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Business  Law 


A  Working  Manual  of  Every-day  Law 


By 

THOMAS  CONYNGTON 

Of  the  New  York  Bar;  Author  of   "  Corf>orate  Organization 
and  Management,"  "  The  Modern  Corporation,"  etc. 


VOLUME  I 


SECOND  EDITION 
NEW  YORK 

THE  RONALD  PRESS  COMPANY 
1920 


T 


Copyright,  1918,  by 
The  Ronald  Press  Company 


Copyright,  1920,  by 
The  Ronald  Press  Company 


All  Rights  Reserved 


PREFACE 

Law  and  order  are  the  necessary  foundations  for  civilized 
life.  A  pastoral  people  with  few  possessions  needs  few  and 
simple  laws.  A  populous,  modern  state  with  complex  social, 
industrial,  and  commercial  relations  requires  intricate  and  far- 
reaching  regulations.  In  this  country  the  latter  condition 
prevails,  and  our  present  legal  system  has  not  kept  pace  with 
our  perhaps  too  rapid  progress  in  other  ways. 

Our  system  of  laws  is  an  inheritance  from  our  Anglo- 
Saxon  ancestors,  supplemented  by  written  constitutions  and 
multitudinous  legislative  enactments.  Much  of  our  law  is 
judge-made.  Like  our  forebears,  we  revere  precedents  and 
decisions  and  have  more  of  this  kind  of  law  than  we  know 
how  to  use.  We  have  our  federal  courts  and  forty-eight 
separate  state  systems,  all  grinding  out  innumerable  volumes 
of  reports.  In  consequence,  this  source  of  law  has  become 
cumbersome  and  somewhat  unmanageable.  Beyond  this  we 
are  subject  to  the  Constitution  of  the  United  States  with  its 
eighteen  amendments,  as  well  as  the  constitutions  of  our 
individual  states;  to  the  enactments  of  Congress  and  to  those 
of  our  state  legislatures ;  to  the  ordinances  of  boards  of  alder- 
men; to  the  regulations  of  boards  of  health  and  education; 
and  to  the  orders  of  many  other  boards,  bureaus,  commissions, 
and  officials.  With  the  multiplicity  of  regulation  that  all  this 
entails,  it  requires  no  small  amount  of  care  and  study  to  avoid 
unwitting  entanglement  in  the  far-extended  meshes  of  the 
law. 

Yet  from  this  unwieldy  mass  of  law  may  be  elicited  cer- 
tain guiding  principles  that  everyone  should  know — general 
rules  that  will  guide  us  safely  past  most  of  the  difficult  places. 

iii 

687168 


IV  PREFACE 

Knowing  these,  it  is  possible  for  a  man  so  to  shape  his  business 
course  and  his  relations  with  his  fellows  as  to  have  little  to 
do  with  courts  or  lawyers.  Courts  and  lawyers  are  necessary 
institutions — so  are  doctors  and  hospitals — ^but  all  of  us  prefer 
to  avoid  both  so  far  as  possible  and  so  long  as  possible. 

It  is  the  admirable  theory  of  the  law  to  secure  right  and 
justice  to  all  men.  The  practical  application  of  the  law 
through  the  courts,  however,  does  not  always  attain  these 
ends.  Some  reasons  for  this  are  set  forth  in  the  following 
pages.  Also  suggestions  are  given  as  to  how  one  may  shape 
his  conduct  and  manage  his  affairs  in  order  to  avoid  the  more 
serious  legal  difficulties.  The  man  or  woman  who  owns  prop- 
erty, who  does  business  and  engages  in  affairs,  should  know 
the  principles  upon  which  our  law  is  based,  should  know  how 
to  apply  these  principles  to  the  more  usual  happenings,  and 
should  know  when  and  how  to  employ  "counsel  learned  in  the 
law."  The  advice  here  given  is,  as  near  as  may  be,  such 
as  would  be  given  by  a  conscientious  lawyer  who  desired  to 
keep  his  clients  out  of  the  courts,  rather  than  to  win  cases. 
All  men  should  know  some  law,  and  it  is  devoutly  to  be  hoped 
that  the  day  will  come  when  even  those  who  write  romances 
and  photo-plays  will  know  enough  law  to  avoid  the  pre- 
posterous legal  situations  that  cause  so  much  trouble  to  their 
heroes  and  heroines. 

To  better  adapt  the  book  to  the  needs  of  those  intending 
to  become  professional  accountants,  the  C.P.A.  examinations 
of  the  various  states  for  the  past  five  years  have  been  ex- 
amined and,  where  necessary,  the  text  has  been  expanded  to 
cover  all  the  more  important  questions.  Many  of  the  questions 
given  in  these  examinations  refer  purely  to  local  statutes,  and 
answers  must  be  found  in  the  laws  of  the  state  in  which  the 
examination  is  held.  In  such  cases  the  fact  has  been  indicated. 
Other  questions,  outside  the  scope  of  this  work,  are  apparently 
brought  in  by  the  examiners  for  the  purpose  of  keeping  quali- 


PREFACE  y 

fied  students  from  receiving  the  C.P.A.  degree.  This  seems 
a  hard  thing  to  say  but  The  Journal  of  Accountancy  for 
October,  19 19,  expresses  editorially  the  same  opinion: 

Apparently  some  state  boards  in  the  past  have  been  chiefly 
concerned  with  an  effort  to  convince  the  public  of  their 
innate  cleverness.  They  have  presented  questions  which  it 
would  be  ridiculous  to  expect  a  candidate  to  answer  with- 
out reference  to  authorities,  and  as  a  result  they  have  ex- 
cluded many  men  fully  qualified  to  practice  as  public 
accountants.  Out  of  this  condition  has  grown  the  quite  fre- 
quent allegation  that  accountants  are  trying  to  build  up  a 
close  corporation  by  preventing  newcomers. 

To  assist  students  of  business  law,  questions  have  been 
appended  to  each  chapter.  Some  of  these  have  been  taken 
from  C.P.A,  examinations,  some  are  intended  to  provoke  in- 
quiry rather  than  direct  answers,  and  others  are  the  usual  type 
of  review  questions. 

The  author  desires  to  acknowledge  his  indebtedness  to 
Elizabeth  A.  Smart  of  the  New  York  Bar  for  her  valued 
collaboration  on  the  first  edition  of  this  work;  to  W.  J. 
Grange,  of  the  New  York  Bar,  for  careful  reading  and  helpful 
comment;  to  P.  W.  Pinkerton,  of  Indianapolis,  for  his  many 
excellent  suggestions  and  improvements  in  the  text;  to  James 
H.  Wilhoit,  of  the  New  York  Bar,  for  assistance  in  pre- 
paring the  chapter  on  bills  of  exchange;  and  to  Katharine 
S,  Keane,  for  careful  and  intelligent  research  in  connection 
with  the  preparation  of  this  edition  and  for  good  work  in 
the  compilation  of  the  index. 

The  author  desires  further  to  extend  his  thanks  and  testify 
his  appreciation  of  all  those  interested  readers  throughout 
the  country  who  by  their  questions  and  comments  on  the 
original  text  have  enabled  him  to  make  the  present  edition 
more  accurate  and  comprehensive  than  would  otherwise  have 


VI  PREFACE 

been  possible.     He  bespeaks  for  the  present  volumes  a  con- 
tinuance of  their  kindly  interest. 

Blackstone  has  said  in  his  famous  Commentaries  that  "the 
science  of  the  law  should  in  some  manner  be  the  study  of 
every  free  citizen."  If  this  work  can  make  plain  to  its  readers 
some  of  the  practical  features  of  the  law  under  which  we 
live,  so  that  they  may  appreciate  its  virtues  and  know  its 
faults,  and  from  that  knowledge  may,  by  their  influence  and 
votes,  strive  to  simplify  its  procedure  and  remedy  its  deficien- 
cies, the  book  will  have  served  its  end. 

Thomas  Conyngton 
New  York  City, 
March  i,  1920. 


CONTENTS 


VOLUME  I 

Part  I — The  Law  of  the  Land 
Chapter  Page 

I    Evolution  of  Law 3 

§  I.  Definition 

2.  The  Origin  of  Law 

3.  Law  and  Liberty 

4.  Sources  of  I^w 

II    The  Written  Law 7 

§  5,  Definition 

6.  Constitutional  Government 

7.  The  United  States  Constitution 

8.  Laws  of  Congress 

9.  State  Constitutions 

10.  Constitutional  Amendments 

11.  Constitutions  that  Legislate 

12.  Legislative  Enactments 

13.  Statute  Law 

14.  Subsidiary  Laws 

III  The  Unwritten  Law 15 

§  15,  Definition 

16.  The  Doctrine  of  Precedents 

17.  Court  Reports 

18.  The  Volumes  of  Reports 

19.  Citations 

20.  The  Common  Law 

21.  Law-Merchant  and  Commercial  Law 

22.  Unconstitutional  Laws 

23.  The  Recall  of  Judges 

IV  Law  and  Equity  22 

§  24.  Remedial  Law 

25.  Equity  in  the  Legal  Sense 

26.  Suits  at  Law  and  in  Equity 

27.  Bringing  a  Suit  at  Law 

28.  Trial  at  Law 

29.  Bringing  a  Suit  in  Equity 

30.  Appeals  to  a  Higher  Court 

31.  Advisability  of  Litigation 

V    Criminal  Law 35 

§  32.  Criminal  Procedure 

33.  Classes  of  Offenses  Against  the  Criminal  Law 

34.  Penalties 

vii 


vm  CONTENTS 

Part  II — Contracts 
Chapter  Page 

.VI    Essential  Features  of  a  Contract         .      •>      .       ,       41 
§  35.  Introductory 
36.  Definition 
37    Essential  Features 

38.  Competency  of  Parties 

39.  The  Subject  Matter  Must  be  Lawful 

40.  The  Law  of  Place 

41.  The  Subject  Matter  Must  Exist 

42.  Agreement  of  the  Parties 

43.  Oral  Agreement 

44.  Consideration 

VII    How  Contracts  Are  Made 56 

§  45.  Classification  of  Contracts 

46.  Oral  Contracts 

47.  Written  Contracts 

48.  The  Statute  of  Frauds 

49.  Contracts  Under  Seal 

50.  Contracts  of  Record 

51.  Express  and  Implied  Contracts 

52.  Quasi  Contracts 

53.  Executory  and  Executed  Contracts 

54.  Conditions  Precedent  and  Subsequent 

55.  Void  and  Voidable  Contracts 

56.  Drafting  a  Contract 

vrn    Effect  of  Contracts 68 

§  57.  Illegal  Contracts 

58.  Effect  of  Mistakes 

59.  Effect  of  Fraud 

60.  Duress 

61.  Undue  Influence 

62.  Law  as  to  Alteration 

63.  Interpretation  of  Contracts 

IX    Assignment  and  Novation 79 

§  64.  Assignment  of  Contracts 
65.  Novation 

X    Discharge  of  Contracts 84 

§  66.  Discharge  by  Performance 

67.  Discharge  by  Agreement 

68.  Discharge  by  Various  Other  Causes 

XI    Enforcement  of  Contracts 92 

§  69.   Breach  of  Contract 

70.  Remedies  for  Breach  of  Contract 

71.  Law  Governing  Remedy 

72.  Statute  of  Limitations 


CONTENTS  i   IX 

Chapter  Page 

XII    Actions  on  Contracts — General  Rules  .      .      103 

§  73.  Introductory 

74.  Specific  Performance 

75.  Rules  of  Evidence 

XIII    Tender  of  Payment  or  Performance     .       .       .       .      iii 

§  76.  Definition 

77.  Time  to  Tender  Performance 

78.  Extent  and  Kind  of  Tender 

79.  Acceptance  of  Tender 

XrV    Joint  and  Several  Contracts 115 

§  80.  Contracts  Made  by  More  Than  Two  Parties 

Part  Ill—Sales 

XV    Contracts  to  Sell 121 

§  81.  Sales  and  Contracts  to  Sell 

82.  Uniform  Sales  Act 

83.  What  is  Necessary  to  the  Contract  of  Sale 

84.  The  Agreement 

85.  Sales  to  Persons  Incompetent  to  Contract 

86.  The  Consideration 

87.  Nature  of  Subject  Matter 

88.  Destruction  of  Subject  Matter 

89.  Sales  to  Arrive 

90.  A  Contract  of  Sale  Must  Be  Legal 

XVI    Passing  Title .129 

§  91.  Delivery 

92.  Selection  Necessary  to  Delivery 

93.  When  the  Title  Passes 

94.  Sales  Without  Delivery 

95.  Conditional  Sales 

96.  State  Laws  on  Conditional  Sales 

97.  Requirement  of  Affidavits  to  Conditional  Sales 

Contracts 

98.  Rights  in  Illinois  and  Pennsylvania 

99.  Protection  Against  Landlord's  Lien 

100.  Protection  Against  Destruction  of  Property 

XVII    Tee  Statute  of  Frauds 138 

§101.  Description  of  the  Statute  of  Frauds 

102.  Contracts  to  Sell 

103.  When  the  Contract  of  Sale  Must  be  in  Writing 

104.  Exception  for  Part  Payment 

105.  Exception  for  Part  Delivery 

106.  Exception  for  Amounts  Below  Specified  Value 

107.  Exception  for  Work  or  Services 


X  CONTENTS 

Chapter  Page 

XVIII    Warranties     . 144 

§  108.  Introductory  ^ 

109.  Conditions  Precedent 

no.  Conditions  Subs«juent 

111.  Express  Warranties 

112.  Implied  Warranties 

XIX    Remedies 151 

§  113.  Rights  of  Unpaid  Seller  Under  the  Contract 

114.  Rights  of  Buyer 

115.  Rescission  of  Sale 

XX    Sales  at  Auction 159 

§  116.  Regulations  for  Sales  at  Auction 

117.  Compliance  with  Conditions 

118.  Duties  of  Auctioneer 


Part  IV — Agency 

XXI    Principles  of  Agency        . 165 

§119.  Introductory 

120.  Definitions 

121.  The  Principal 

122.  The  Agent 

123.  General  Agents 

124.  Special  Agents 

125.  Del  Credere  Agents 

XXII    The  Contract  of  Agency 173 

§  126.  Appointment 

127.  Express  Appointment 

128.  Imphed  Appointment 

129.  Ratification 

130.  Sealed  Contracts 

131.  Appointment  of  Subagents 

132.  Servants  and  Employees 
133-  Void  Contracts  of  Agency 

XXIII  The  Principal  "■.       .      i8« 

§  134.  Principal's  Duty  to  Agent 

135.  Principal's  Duty  to  Third  Party 

136.  Principal's  Liability 

137.  An  Undisclosed  Principal 

XXIV  The  Agent  ~ . —  .188 

§  138.  Agent's  Duty  to  Principal 
139-  Agent's  Obedience 

140.  Agent's  Good  Faith 

141.  Agent's  Care,  Skill,  and  Diligence 

142.  The  Agent's  Signature 


CONTENTS  Xi 

Chapter  Page 

§  143.  Agent's  Duty  to  Third  Party 

144.  Limitation  of  Agent's  Authority 

145.  Agent's  Fraudulent  Conduct 

146.  Agent's  Liability 

XXV    The  Third  Party      ........       202 

§  147.  Third  Party's  Relation  to  Agent 
148.  Third  Party's  Relation  to  the  Principal 

XXVI    Termination  of  Agency 205 

§  149.  Termination  by  Fulfilment 

150.  Termination  by  Either  Party 

151.  Termination  by  Disability 

152.  An  Agent  with  an  Interest 


Part  V — Negotiable  Instruments 

XXyil    Form  and  Interpretation 213 

5  153.  The  Quality  of  Negotiability 

154.  Signature 

155.  Unconditional  Promise 

156.  Certainty  as  to  Sum 

157.  Payable  on  Demand 

158.  Certain  Future  Time 

159.  Payable  to  Order 

160.  Payable  to  Bearer 

161.  The  Date 

162.  Consideration 

163.  Delivery 

164.  Rules  of  Construction 
I  6k.  Allowable  Provisions 

1 66.  Non- Essentials 

XXVIII    Negotiation 222 

§  167.  Method  of  Negotiation 

168.  The  Indorser's  Contract 

169.  Blank  or  Special  Indorsement 

170.  Restrictive  Indorsement 

171.  Qualified  Indorsement 

172.  Conditional  Indorsement 

173.  EfiEect  of  Indorsement 

XXIX    Rights  of  Holder 226 

S  174.  Holder  in  Due  Course 

175.  Defects  of  Title 

176.  The  Rights  of  a  Holder  in  Due  Course 

177.  Efifect  of  Irregular  Transfer 


Xii  CONTENTS 

Chapter  Page 

XXX    Liability  of  Parties 229 

§  178.  Liability  of  Maker 

179.  Liability  of  Indorser 

180.  Discharge  of  Indorser 

181.  Liability  of  Guarantor 

182.  Liability  of  Accommodation  Signer 

XXXI    Presentment  for  Payment  234 

§  183.  Necessity  of  Presentment 

184.  Requirements  for  Presentment 

185.  Presentment  Excused 

186.  When  Due 

XXXII    Notice  of  Dishonor 237 

§  187.  Necessity  of  Notice 

188.  Effect  of  Notice 

189.  Form  of  Notice 

190.  Time  of  Notice 

191.  Where  to  Send  Notice 

192.  When  Notice  Is  Not  Required 

193.  Protest 

XXXIII  Discharge  of  Negotiable  Instruments    ...      341 

§  194.  When  Discharged 

195.  When  Not  Discharged 

196,  Effect  of  Alteration 

XXXIV  Promissory  Notes 243 

§  197.  Definition 

198.  Liability  of  Maker 

199.  Interest 

200.  Demand  Notes 

201.  Effect  of  Renewal 

202.  Note  as  a  Gift 

XXXV    Bills  of  Exchange  and  Acceptances       ...      247 

§  203.  Definition 

204.  Liability  of  Maker,  Drawer,  and  Acceptor 

205.  Acceptance 

206.  Dollar  Acceptance 

207.  Bank  Acceptances 

208.  Domestic  Bank  Acceptances 

209.  Trade  Acceptances 

210.  The  Discount  of  Acceptances 

211.  Rules  for  Discount  of  Bank  Acceptances 

212.  Rules  for  Discount  of  Trade  Acceptances 

213.  The  Drawee 

214.  Presentment  for  Acceptance 

215.  Protest  for  Non- Acceptance 

216.  Bills  in  a  Set 


CONTENTS  xiii 

Chapter  Page 

XXXVI    Bakk.  Checks  257 

§  217.  Definition 

218.  Checks  as  Evidence  of  Pa5rment 

219.  Signature  of  Drawer 

220.  Presentment  for  Payment 

221.  Bank's  Relations  with  Depositor 

222.  Bank's  Relations  with  Holder 

223.  Revocation 

224.  Certification 

225.  Fraud 

226.  Checks  as  Gifts 


Part  VI — Insurance 

XXXVII    Fire  Insurance 267 

§  227.  The  Parties 

228.  Nature  of  the  Contract 

229.  Agents 

230.  The  Policy 

231.  Premiums  , 

232.  The  Property  Insured 

233.  Warranties  and  False  Re->resentations 

234.  Settlement  of  Losses 

XXXVIII    Lite  Insurance 280 

§  235.  Nature  of  Contract 

236.  Insurable  Interest 

237.  The  Parties 

238.  The  PoUcy 

239.  Premium  Rates 

240.  Agents 

241.  Right  to  Change  Beneficiary 

242.  Assignment  of  Policy 

243.  Settlement  of  Losses 

244.  Government  Insurance  for  Soldiers  and  Sailors 

XXXIX    Sundry  Insurance  Contracts  ....      290 

§  245.  Enumeration 

246.  Marine  Insurance 

247.  General  and  Particular  Average 

248.  Accident  Insurance 

249.  Health  Insurance 

250.  Group  Insurance 

251.  Liability  Insurance 

252.  Title  Insurance 

253.  Burglary  Insurance 

254.  Plate  Glass  Insurance 

255.  Automobile  Insurance 
2.';6.  Other  Forms  of  Insurance 


XIV  CONTENTS 

Part  VII — Employment 
Chapter  Page 

XL    The  Contract  of  Employment 301 

§  257.  Introduction 

258.  Definition 

259.  What  Constitutes  a  Contract  of  Employment 

260.  Independent  Contractors 

261.  Interpretation  of  Contract 

262.  An  Express  Contract  Cannot  be  Proved  by  Ctistom 

263.  Wages 

264.  Modification  of  Contract 

265.  When  Contract  Begins 

266.  Termination  of  Contract 

267.  Termination  of  Contract  by  Breach 

268.  Rights  and  Remedies 

269.  Employment  after  Expiration  of  Contract 

XLI    Relations  of  Parties 312 

§  270.  Duties  of  Employee  to  Employer 

271.  Duties  of  Employer  to  Employee 

272.  Presumption  with  Regard  to  Joint  Owners 

273.  Wages 

274.  Fines,  Deductions,  etc. 

XLII    Employer's  Responsibility 324 

§  275.  Introductory 

276.  Doctrine  of  Assumption  of  Risk 

277.  Doctrine  of  Contributory  Negligence 

278.  The  Fellow-Servant  Rule 

279.  Employers'  Liability  Acts 

280.  Workmen's  Compensation  Acts 

281.  Modem  Statutory  Law 

282.  Schedules  of  Compensation 

283.  Who  are  Entitled  to  Compensation 

284.  Employer's  Defenses  Taken  Away  by  the  New  Act 

285.  Third  Persons 


Part  VIII — Partnership 

XLIII    Introductory •    .       .      339 

§  286.  Definition 
287.  Partnerships   Distinguished  from  Non-Partnership 
Organizations 

XLIV    The  Contract  of  Partnership 344 

§288.  Parties 

289.  Kinds  of  Partners 

290.  Partnership  Contracts 

291.  The  Firm  Name 

292.  Partnership  a  Personal  Relation 

293.  Classification  of  Partnerships 


CONTENTS  XV 

Chapter  Page 

XLV    Partnership  Property 353 

§  294.  Nature  of  Partnership  Property 

295.  Liability  of  Partnership  Property  for  Debts 

296.  Profits 

XLVI    Powers  akd  Liabilities  of  Partners         ...      361 

§  297.  Powers  of  Partners 

298.  Liabilities  to  Copartners 

299.  Intra-Partnership  Relations 

300.  Liabilities  to  Third  Persons 

XLVII    Termination  of  partnership '368 

§  301.  Termination  by  Agreement 

302.  Enforced  Dissolution 

303.  Winding  up  the  Business 


Part  IX — Corporations 

XLVIII    Nature  of  Corporations 377 

§  304.  Corporate  Entity 

305.  Classification 

306.  Corporations  Without  Capital  Stock 

307.  Corporations  With  Capital  Stock 

308.  Distinctive  Features 

309.  (i)  Creation  by  the  State 

310.  (2)  Limited  Powers 

311.  (3)  Limited  Liability 

312.  (4)  Legal  Entity  of  Corporation 
313-  (5)  Permanence 

314.  (6)  Stock  System 

315-  (7)  Corporate  Mechanism 

316.  Attractiveness  to  Investors 

317.  Disadvantages  of  the  Corporate  Form 

XLIX    The  Charter 385 

§318.  Definition — Synonyms 

319.  Charter  Powers —  General 

320.  (i)  To  Sue  and  Be  Sued 

321.  (2)  To  Use  a  Seal 

322.  (3)  To^Buy,  Sell,  and  Hold  Property 

323.  (4)  To  Appoint  Directors,  Officers,  and  Agents 

324.  (5)  To  Make  By-Laws 

325.  (6)  To  Dissolve  Itself 

326.  (7)  To  Do  All  Things  Necessary 

327.  Charter  Powers — Special 

328.  Things  Ultra  Vires 

329.  Amendment  of  Charter 


XVI  CONTENTS 

Chapter  Page 

L    Incorporation 391 

§  330.  Application  for  Incorporation 

331.  Incorporators 

332.  Name  of  Corporation 

333.  Purposes 

334.  Capitalization 

335.  Shares 

336.  Location 

337.  Duration 

338.  Number  of  Directors 

339.  Classification  of  Stock 

340.  Cumulative  Voting 

341.  Execution  of  Certificate 
*              342.  Filing  and  Recording 

343.  De  Facto  Corporation 

344.  Contracts  Prior  to  Incorporation 

LI    By-Laws 398 

§  345.  Definition 

346.  Adoption 

347.  Amendment 

348.  Enforcement 

LII    Stock  401 

§  349-  Capital  Stock 

350.  Stock  Certificates 

351.  Capital  Stock  vs.  Capital 

352.  Unissued  and  Issued  Stock 

353.  Full-Paid  Stock 

354.  No  Par  Value  Stock 

355.  Common  Stock 

356.  Preferred  Stock 

357.  Treasury  Stock 

358.  Lx)st  Certificates 

359.  How  Transferred 

LIII    Stockholders  and  Their  Meetings 410 

§  360.  Incorporators 

361.  What  Constitutes  a  Stockholder 

362.  Rights  of  Stockholders 

363.  Powers  of  Stockholders 

364.  Liabilities  of  Stockholders 

365.  Stockholders'  Meetings 

366.  Quorum 

367.  Voting 

368.  Voting  Trusts 

369.  Proxies 

LIV    Directors  and  Officers .      417 

§  370.  Status  and  Functions  of  Directors 

371.  Number  and  Authority 

372.  Liabilities 

373.  Qualifications 


CONTENTS  xvii 

Chapter  Page 

§  374-  Vacancies  and  Removal  of  Directors 

375.  Regular  Meetings 

376.  Special  Meetings 

377.  Quorum 

378.  Officers 

379.  Salaries 

380.  Vacancies  and  Removal  of  OflBcers 

381.  Dividends 

382.  Bank  Deposits 

383.  Execution  of  Contracts 

384.  Corporate  Seal 


VOLUME  II 
Part  X — Real  and  Personal  Property 

LV    Property  Rights 427 

§  385.  Origin  of  Property 

386.  Rights  to  Personal  Property 

387.  Rights  Classified 

LVI    Real  and  Personal  Property  Distinguished     .       .      430 
§  388.  Personal  Property  Defined 

389.  Real  Property  Defined 

390.  Questionable  Cases 

391.  Fixtures 

LVII    Title  to  Personal  Property  433 

§392.  Title 

393.  Original  Title 

394.  Derived  Title 

395.  Accession 

396.  Confusion 

397.  Kinds  of  Ownership 

LVIII    Transfer  of  Personal  Property  ....      438 

§  398.  Gift 

399.  Sale 

400.  Chattel  Mortgage 

401.  Conditional  Sales 

LIX    Estates  in  Real  Property 442 

§  402.  The  Nature  of  Real  Property 

403.  Right  to  Real  Property 

404.  Estates  in  Real  Property 

405.  Remainders  and  Reversions 

406.  Vested  and  Contingent  Remainders 

407.  Executory  Devises 

408.  Time  Limit  to  Effect  and  Executory  Devise 

409.  Dower  and  Curtesy 

410.  Homestead 


xviii  CONTENTS 

Chapter  Page 

411.  Easements 

412.  Joint  Tenancies  and  Tenancies  in  Common 

413.  Trusts 

LX    Title  to  Real  Property  452 

§  414.  Original  Title 
415.  Acquired  Title 

LXI    Transfer  of  Real  Property 454 

§  416.  Conveyance  of  Real  Property 

417.  Warranty  Deed 

418.  Record  of  Deeds 

419.  Restrictions  in  Deeds 

420.  Searching  Title 

421.  Mortgage  of  Real  Property 

422.  Foreclosure 

423.  Kinds  of  Mortgages 

LXII    Landlord  and  Tenant 467 

§  424.  Lease  of  Real  Property 

425.  Parties  to  a  Lease 

426.  Rights  and  Duties  of  a  Landlord 

427.  Rights  and  Duties  of  a  Tenant 

428.  Expediency  of  a  Written  Agreement 

Part  XI — Wills  and  Inheritance 

LXIII    Distribution  of  Property  of  an  Intestate       .       .      475 

§  429.  Definitions 

430.  Rules  of  the  Common  Law 

431.  What  Will  Become  of  Real  Property 

432.  What  Will  Become  of  Personal  Property 

433.  Is  It  Wise  to  Make  a  Will? 

LXIV    How  to  Make  a  Will        .       .       .       .       .       .       .      485 

§  434.  Who  Can  Make  a  Will 

435.  Restrictions  on  the  Power  of  Making  a  Will 

436.  General  Form  for  Wills 

437.  Kinds  of  Wills 

438.  Executors 

439.  Trustees 

440.  Trust  Estates 

441.  Statutes 

442.  How  to  Dispose  of  Real  Property 

443.  How  to  Dispose  of  Personal  Property 

444.  The  Residuary  Clause  and  Its  Uses 

445.  What  to  Do  with  the  Will 

LXV    How  to  Change  or  to  Revoke  a  Will      ...      501 
§  446.  How  to  Change  a  Will 
447.  How  to  Revoke  a  Will 


CONTENTS 


XIZ 


Chapter  Page 

LXVI    Other     Ways    of   Disposing  of    Property  After 

Death 504 

§  448.  Deeds  of  Trust 
449 


Gifts  in  View  of  Death 


LXVII    The  Settlement  of  an  Estate 506 

$  450.  If  the  Deceased  Person  Left  a  Will 

451.  If  the  Deceased  Person  Did  Not  Leave  a  Will 

452.  Settlement  Without  Administrator 


LXVIII    Duties  of  Executors  and  Administrators 
§  453-  The  Procedure  of  Administration 

454.  Inventory 

455.  Advertising  for  Claims 

456.  Paying  Legacies 

457.  Caring  for  Funds 

458.  An  Executor's  Authority 

LXIX    Questions  Between  Life  Tenant  and  Remainderman 
§  459.  How  Conflicting  Rights  Arise 

LXX    Intermediate  and  Final  Accounts      .... 
§  460.  The  Obligation  Account 

461.  Kinds  of  Accounts  to  be  Filed 

462.  Final  Accounting 

463.  Preparing  Accounts 

LXXI    Rights  in  Property  When  There  Is  no  Will 

§  464.  In  the  Case  of  Real  Property 

465.  In  the  Case  of  Personal  Property 

466.  Rights  of  a  Husband  or  a  Wife 

467.  What  Creditors  Must  Do 

LXXII    Rights  in  Property  Left  by  Will      .... 

§  468.  If  Real  Property  Has  Been  Devised  By  Will 

469.  If  Personal  Property  Has  Been  Left  By  Will 

470.  Contesting  a  Will 


512 


S18 


521 


524 


528 


Part  XII — Personal  Relations 

LXXIII    Husband  and  Wife  

§  471.  Persons  Who  May  Marry 

472.  What  Constitutes  a  Marriage 

473.  Personal  Rights  of  Husband  and  Wife 

474.  Rights  of  Husband  and  Wife  in  Each  Other's 

Property 

475.  Rights  of  Husband  or  Wife  In  Case  the  Other  Is 

Injured 

476.  Divorce 


535 


XX  CONTENTS 

Chapter  Page 

LXXIV    Parent  and  Child 546 

§  477.  Duties  and  Rights  of  Father  in  Relation  to  Child 

478.  Duties  and  Rights  of  Mother  in  Relation  to  Child 

479.  What  Duties  and  Rights  May  Be  Claimed  By- 

Adopted  Children 

480.  Children  as  Criminals 

LXXV    Guardian  and  Ward 551 

§481.  Personal  Guardian 
482.  Guardian  of  Property 

Part  XIII— Suretyship 

LXXVI    The  Contract  of  Suretyship  or  of  Guaranty   .      557 

§  483.  Definition 

484.  Nature  of  Contract 

485.  Written  Contract 

486.  Parties 

487.  Consideration 

488.  Delivery  and  Acceptance 

LXXVII    Rights  of  Surety  or  Guarantor     ....      562 

§  489.  Notice 

490.  Defenses 

491.  Reimbursement 

492.  Subrogation 

493.  Contribution 

494.  Extension  of  Time 

495.  Discharge 

Part  XIV— Debts  and  Interest 
LXXVIII    Debts 569 

§  496.  Definitions 

497.  Evidences  of  Debt 

498.  Open  and  Stated  Accounts 

499.  Receipts  and  Releases 

500.  Part  Payment  in  Full  Settlement 

501.  Accord  and  Satisfaction 

502.  The  Appropriation  of  Payment 

503.  Equitable   Jurisdiction    in    Actions   for   an 

Accounting 

LXXIX    Enforcing  Payment  of  Debts 575 

§  504.  When    the   Creditor   Has   Some   Security   for 
the  Debt 

505.  Where  There  Is  No  Security  for  the  Debt 

506.  Attempts  to  Defraud  Creditor 

507.  The  Modem  Theory  of  Credit 

508.  Liens 

509.  Attachment 

510.  Execution 

511.  Garnishment 


CONTENTS  XXI 

Chapter  Page 

LXXX    Interest 584 

§  512.  Interest 

513.  Discount 

514.  Usury 

515.  Compound  Interest 

516.  Partial  Payments 

Part  XV— Bankruptcy 

LXXXI    Assignment  for  the  Benefit  of  Creditors         .      591 

§  517.  Introductory 

518.  Rights  of  Debtors 

519.  Rights  of  Creditors 

520.  Void  Assignments 

52 1 .  Rights  and  Duties  of  an  Assignee 

522.  Form  of  the  Assignment 

523.  Revocation  of  Assignment 

524.  Insolvency 

LXXXI  I    Bankruptcy  Proceedings 598 

§  525.  Receivership- 

526.  Bankruptcy 

527.  Voluntary  Bankruptcy 

528.  Involuntary  Bankruptcy 

529.  Persons  Who  May  Bring  Bankruptcy  Proceedings 

530.  Persons  Who  May  Become  Involuntary  Bankrupts 

LXXXIII    Bankruptcy  Proceedings  (Continued)  604 

§  531.  How  Bankruptcy  Proceedings  Are  Instituted 

532.  The  Referee 

533.  Procedure 

534.  Creditors 

535.  Rights  and  Duties  of  Receiver 

536.  Rights  and  Duties  of  Trustee 

537.  Rights  and  Duties  of  Bankrupts  in  Bankruptcy 

Proceedings 

538.  Preferred  Creditors 

LXXXIV    Discharge  in  Bankruptcy  .  .       .   •    .      613 

§  539-  Discharge  of  a  Bankrupt 
540.  What  Debts  Remain  Undischarged 

Part  XVI — Bailments  and  Common  Carriers 

LXXXV    Bailments 619 

§  541.  What  Is  Meant  by  Bailment 

542.  Kinds  of  Bailment 

543.  Mandate  and  Deposit 

544.  Commodatiun  or  Loan 


XXii  CONTENTS 

Chapter  Page 

§  545.  Pledge  or  Pawn 

546.  Hiring  of  a  Chattel 

547.  Bailment  for  Custody,  Services,  or  Transport 

548.  The  Contract  of  Baiknent 

549.  Property  Rights 

550.  Duties  of  a  Bailee 

551.  Dissolution  of  Bailment 

LXXXVI    Common  Carriers 629 

§  552.  Common  Carriers 

553.  The  Lien  of  The  Common  Carrier 

554.  The  Termination  of  the  Bailment 

555.  Interstate  Commerce  Commission 

556.  Bills  of  Lading 

557.  Carriers  of  Passengers 

558.  Telephone  and  Telegraph  Companies 


Part  XVII — Patents,  Trade-Marks,  and  Copyrights 

LXXXVII    Patents  639 

§  559-  Constitutional  Authority 

560.  Introductory 

561.  Who  May  Obtain  a  Patent 

562.  What  Inventions  are  Patentable 

563.  What  Is  Unpatentable 

564.  Procedure  to  Obtain  Patent 

565.  Procedure  in  the  Patent  Office 

566.  Interference  Proceedings 

567.  Final  Decision 

568.  Government  Fees  and  Grant 

569.  Marking  a  Patented  Article 

570.  Design  Patents 

571.  Foreign  Patents 

572.  Assignments  and  Ltcenses 

573.  Joint  Inventors 

574.  Infringements 

575.  Official  Publication 

576.  Practical  Information 

LXXXVIII    Trade-Marks 654 

§  577.  Description 

578.  Common  Law  Trade-Marks 

579.  Essential  Elements  of  a  Trade- Mark 

580.  What  May  Not  Be  Used 

581.  What  Can  Be  Used 

582.  The  Common  Law  Right 

583.  Trade-Marks  are  Not  Assignable  Apart  from 

Business 

584.  Summary 


CONTENTS  xxiii 

Chapter  Page 

LXXXIX    Registration  of  Trade-Marks       ....      660 
§  585.  The  Federal  Trade-Mark  Law 

586.  The  Ten- Year  Clause 

587.  Who  May  Register  a  Trade-Mark 

588.  Procedure  for  Registration 

589.  What  Will  Bar  a  Trade-Mark 

590.  Opposition  to  Registration 

591.  Amendments,  Rejections,  and  Appeals 

592.  Certificate  of  Registration 

593.  Assignments 

594.  Foreign  Registration 

XC    Trade-Names  and  Unfair  Competition       .       .      666 

§  595-  Unfair  Competition  Defined 

596.  Trade-Names 

597.  Secondary  Meaning 

598.  Personal  and  Corporate  Names 

599.  Geographical  Names 

600.  Imitation  of  Packages 

601.  Other  Forms  of  Unfair  Competition 

602.  Price  Cutting 

XCI    Copyrights  075 

§  603.  Definition 

604.  Who  May  Obtain  Copyright 

605.  Subject  Matter  of  Copyrights 

606.  The  First  Step 

607.  Subsequent  Procedure 

608.  Making  Out  the  Application  for  Copyright 

609.  The  Affidavit 

610.  The  Fees 

611.  The  Books  Deposited 

612.  Time  for  Filing  Copyright 

613.  Renewals 

614.  British  Copyright 


Part  XVIII— Taxation 

XCII    Laying  Taxes 687 

§  615.  Who  Has  the  Right  to  Lay  Taxes 

616.  Purposes  for  Which  Tax  May  Be  Laid 

617.  Methods  of  Taxation 

6i8.  Extent  to  Which  Persons  May  Be  Taxed 

XCIII    Collecting  Taxes 693 

§  619.  Assessment  of  Real  Property 

620.  Assessment  of  Personal  Property 

621.  Payment  of  Taxes 

622.  Taxation  of  Corporations 

623.  The  Federal  Income  Tax 


xxiv  CONTENTS 

Part  XIX — Arbitration 

Chapter  Page 

XCIV    Arbitration  and  Law 701 

§  624.  Advantages  of  Arbitration 

625.  Objections  to  Arbitration 

626.  Statutory  Arbitration 

627.  Agreement  for  Arbitration 

628.  Withdrawal  from  Arbitration 

629.  Hearings 

630.  Signing  the  Award 

631.  Enforcing  the  Award 

632.  Setting  Aside  the  Award 


Part  XX — Law  and  Lawyers 

XCV    Study  of  Law  for  Business  Men         ....       711 

§  633.  Law  Books  for  Study 

634.  Law  Books  for  a  Busy  Man 

635.  The  Case  Method  of  Legal  Study 

636.  Taking  a  Law  Course 

637.  Courses  in  Commercial  Law 

XCVI    Choosing  a  Lawyer  716 

638.  The  Legal  Profession 

639.  The  Domination  of  Precedent 

640.  The  Conservatism  of  the  Law 

641.  Ethical  Standards  of  the  Bar 

642.  The  Criminal  Lawyer 

643.  Selecting  a  Lawyer 

644.  Lawyers'  Compensation 

XCVII    Law  as  a  Vocation 726 

§  645.  Necessity  of  the  Work  of  a  Lawyer 

646.  The  Work  of  the  Family  Lawyer 

647.  Business  and  Public  Life 

648.  The  Effect  of  Legal  Training 

649.  The  Dignity  of  the  Profession 

650.  Law  as  a  Practical  Vocation 

651.  Succeeding  in  the  Law 

652.  Deceptive  Statistics 

653.  Practical  Directions 


Part  XXI— Forms 

XCVIII    Drafting  a  Contract 739 

Form 
I .  The  Contract  as  Drafted 


CONTENTS  XXV 

Chapter  Page 

xcix    evidenctng  an  instrument 744 

Form 

2.  Agent's  Signature 

3.  Corporate  Signatures  to  Letters 

4.  Corporate  Signature 

5.  Testimonium  Clause — Two  Corporate  Signatures 

6.  Testimonium  Clause — Corporate  and  Individual  Sig- 

natures 

7.  Attestation  Clause 

8.  Attestation  Clause  in  a  Will 

9.  Acknowledgment  of  Individual  Person 

10.  Acknowledgment  of  Attorney 

11.  Clerk's  Authentication 

12.  Affidavit 

C    Contract  Forms •       *       •      757 

•  Form 

13.  Simple  Contract 

14.  Contract  by  Letters 

15.  Unilateral  Contract 

16.  Formal  Contract 

17.  Corporate  Contract 

18.  Assignment  of  Contract 

19.  Assignment  of  Contract — Indorsement  Form 

CI    Forms  of  Sales  Contracts     , 762 

Form 

20.  Memorandum  of  Sale 

21.  Contract  of  Sale  by  Letters 

22.  Conditional  Sales  Contract 

23.  Bill  of  Sale — Personal 

24.  Bill  of  Sale — Personal 

25.  Contract  of  Warranty 

CXI  Agency  Forms 767 

Form 

26.  Appointment  of  Special  Agent 

27.  Appointment  of  General  Agent 

28.  Power  of  Attorney 

29.  Power  of  Attorney — Corporate 

30.  Revocation  of  Power  of  Attorney 

31.  Proxy — Simple  Form 

32.  Proxy — Unlimited 

33.  Revocation  of  Proxy 

CIII    Forms  of  Negotiable  Instruments      ....      773 

Form 

34.  Check  by  Individual 

35.  Corporate  Check 

36.  Corporate  Indorsement  of  Check 

37.  Voucher  Check 

38.  Note  by  Individual 

39.  Corporate  Note — by  President 


XXvi  CONTENTS 

Chapter  Page 

Form 

40.  Corporate  Note — By  Treasurer 

41.  Corporate  Note — Collateral  Security 

42.  Sight  Draft 

43.  Bank  Acceptance 

44.  Trade  Acceptance 

45.  Certificate  of  Protest 

CIV    Forms  of  Employment  Contracts  ....      781 

Form 

46.  Contract  of  Employment — Simple  Form 

47.  Contract  of  Employment 

48.  Contract  of  Employment  by  Letters 

49.  Contract  of  Employment  with  Share  in  Profits 

CV    Partnership  Forms 784 

Form 

50.  Simple  Articles  of  Partnership 

51.  Articles  of  Copartnership 

52.  Sundry  Partnership  Clauses 

CVI    Corporate  Organization  Forms 788 

Form 

53.  Subscription  List 

54.  Stock  Certificate — Common  Stock 

55.  Assignment  of  Stock  Certificate 

56.  Certificate  of  Incorporation — New  York 

57.  By-Laws — Simple  Form 

CVII    Forms  for  Corporate  Meetings 797 

Form 

58.  Call  and  Waiver  for  Special  Meeting  of  Directors 

59.  Agreement  to  Consent  Meeting  of  Directors 

60.  Notice  of  Special  Meeting  of  Directors 

61.  Minutes  of  Special  Meeting  of  Stockholders 

62.  Minutes  of  Regular  Meeting  of  Directors 

63.  Motions 

64.  Directors'  Resolutions 

65.  Certified  Resolution  Designating  Bank 

CVIII    Miscellaneous  Corporate  Forms  ....      804 

Form 

66.  Resignation  of  Director — Tentative 

67.  Resignation  of  Director — Peremptory 

68.  Report  of  Committee  on  By-Laws 

69.  Treasurer's  Affidavit — Corporate  Statement 

CIX    Real  and  Personal  Property  Forms     ....      807 
Form 

70.  Chattel  Mortgage 

71.  Lease 

72.  Deed  With  Full  Covenants 

73.  Real  Estate  Mortgage 


CONTENTS  XXVU 

Chapter  Page 

CX    Sundry  Forms 8ii 

Form 

74.  General  Release 

75.  wm 

76.  Bill  of  Lading 

77.  Guaranty  Contract 

78.  Guaranty  Contract  by  Letter 

79.  Agreement  for  Arbitration 


Appendix 

Appendix  A — Chart  Showing  Jurisdiction  of  State  Courts  821 

B — A  Professional  Law  Library        ....  822 

C— Glossary 826 


I^H 


BUSINESS  LAW 


PART  I 
THE  LAW  OF  THE  LAND 


CHAPTER  I 

EVOLUTION  OF  LAW 

§  I.     Definition 

The  English  word  "law"  has  a  variety  of  meanings.  We 
talk  loosely  of  the  law  of  gravitation,  civil  law,  common  law, 
written  law,  ecclesiastical  law,  the  laws  of  health,  the  laws  of 
God,  etc.,  etc.  For  the  sake  of  clearness  it  is  necessary  in  this 
book  to  limit  the  word  to  those  rules  of  action  and  conduct 
which  regulate  our  relations  with  our  fellow  men. 

The  legal  definition  of  law  is  "a  rule  of  action  prescribed 
by  the  supreme  authority,"  and  to  that  is  usually  added,  "com- 
manding that  which  is  right  and  prohibiting  that  which  is 
wrong."  This  last  part  of  the  definition  must  always  be  quali- 
fied by  the  explanation  that  the  words  "right"  and  "wrong" 
in  this  connection  are  to  be  construed  as  legally  right  and 
legally  zurong.  At  times  what  is  legally  right  may  be  morally 
wrong,  and  at  other  times  what  is  legally  wrong  may  be 
morally  right. 

§  2.     The  Origin  of  Law 

It  is  impossible  to  imagine  any  state  of  society  without 
some  law,  that  is,  some  "rule  of  action."  A  solitary  man  in  an 
uninhabited  country  might  be  said  to  be  without  law,  but  as 
soon  as  one  other  human  being  came  into  any  relation  with 
him,  certain  rules  and  customs  would  grow  up  to  regulate  their 
mutual  rights,  and  these  would  soon  have  the  form  and  the 
force  of  law.  Children  in  their  play  have  rules  and  customs 
to  govern  their  actions.    Among  the  students  of  every  college 


4  THE  LAW  OF  THE  LAND 

there  is  a  curiously  complex  system  of  rules  and  customs, 
rigidly  enforced,  which  defines  the  rights  and  the  duties  of  the 
different  classmen  and  their  relations  to  others  in  the  college. 

A  simple  people  living  in  a  sparsely  settled  country  could 
get  along  with  a  minimum  of  law,  but  a  highly  organized 
people  living  in  a  densely  populated  country  require  many 
laws.  Strangers  used  to  comment  on  the  number  of  "Es  ist 
verboten"  signs  in  Germany,  but  a  complicated  system  of  law 
is  the  necessary  consequence  of  a  dense  population  and  a 
highly  organized  social  structure. 

§  3.     Law  and  Liberty 

Laws  are  a  necessary  evil  incident  to  social  existence.  The 
lone  man  in  a  wilderness  has  complete  liberty.  As  others  join 
him,  laws  and  established  rules  become  necessary.  Every  law 
and  every  rule  subtracts  from  the  individual's  previous  liberty 
of  action  and  circumscribes  his  freedom.  On  the  other  hand, 
the  advantages  of  social  life  and  achievement  are  great;  there- 
fore the  majority  of  mankind  are  willing  to  pay  the  price, 
which  is  submission  to  law.  The  trouble  comes  from  the 
fractious  few  who,  while  they  enjoy  the  advantages  of  living 
in  a  civilized  community,  are  not  willing  to  pay  the  price,  and 
who  seek  to  evade  the  laws  which  are  obeyed  by  others  and 
which  alone  make  the  civilized  community  possible. 

§  4.     Sources  of  Law 

The  beginnings  of  our  legal  system  go  back  to  the  early 
history  of  our  country  when  the  colonists  from  England  first 
established  courts,  and  decided  the  cases  that  came  up  accord- 
ing to  the  principles  of  the  law  of  England  as  it  existed  at 
that  time — that  is,  they  utilized  as  much  as  was  applicable  to 
conditions  prevailing  in  the  colonies.  This  law  was  prin- 
cipally the  famous  "common  law"  of  England  that  had  grown 
up  through  centuries.    Its  provisions  were  of  great  advantage 


EVOLUTION  OF  LAW  5 

to  the  colonists  when  the  rights  conferred  by  common  law 
were  infringed  by  the  arbitrary  acts  of  the  home  government. 

They  were  able  to  show  that  the  rights  they  claimed  were 
conferred  by  the  common  law,  and  that  the  king  and  the 
parliament  were  seeking  to  deprive  them  of  the  common 
birthright  of  Englishmen.^ 

Colonial  Charters.  Most  of  the  colonies  had  been  estab- 
lished under  charters — instruments  which  served  as  our  writ- 
ten constitutions  do  now.  Connecticut  and  Rhode  Island 
continued  to  use  colonial  charters  as  substitutes  for  constitu- 
tions even  after  the  Revolution.  To  the  common  law  were 
added  the  enactments  of  the  colonial  legislatures  that  had  been 
established  in  each  colony.  The  power  of  these  colonial  legis- 
latures was  limited  by  the  provisions  of  the  charter  under 
which  the  particular  colony  existed. 

Effect  of  the  Articles  of  Confederation.  At  the  time  of 
the  Revolution  the  colonies  adopted  the  Articles  of  Confedera- 
tion, which  left  each  separate  colony  to  establish  such  govern- 
ment as  it  saw  fit.  The  authority  of  these  governments  was 
expressed  usually  In  a  constitution  which  took  the  place  of 
the  old  charter  and  in  legislative  enactments  passed  to  sup- 
plement the  constitution  and  to  apply  general  principles  to 
particular  cases. 

The  Federal  Constitution.  Later,  when  the  Federal  Con- 
stitution was  adopted,  its  authority  became  supreme,  and  as 
each  colony  joined  the  new  nation  the  local  governments  were 
shaped  according  to  the  basic  principles  of  the  Federal  Con- 
stitution. The  common  law,  the  state  constitutions  and 
charters,  and  the  enactments  of  state  legislatures,  all  gave  way 
on  any  point  that  conflicted  with  the  Federal  Constitution. 
This  subject  is  treated  more  fully  in  the  two  succeeding 
chapters. 


>  Cooley's  Constitutional  Limiutions,  Chapter  III. 


6  THE  LAW  OF  THE  LAND 

Review  Questions 

1.  Give  the  legal  definition  of  "the  law." 

2.  What  do  you  understand  by   "the   supreme   authority"   in  the 

definition? 

3.  Mention  some  action  legally  right  but  morally  wrong. 

4.  How  far  is  the  law  a  guide  to  what  is  morally  right? 

5.  Can  you  make  men  moral  by  law? 

6.  What  is  the  origin  of  law? 

7.  What  is  the  origin  of  the  laws  regulating  the  operation  of  auto- 

mobiles?    How  far  do  they  date  back? 

8.  If  a  body  of  men  were  wrecked  on  an  uninhabited  island  would 

they  be  subject  to  any  law?    What  would  probably  happen? 

9.  Why  are  we  willing  to  submit  to  law  and  lose  our  freedom  to  do 

as  we  choose? 

10.  What  would  be  the  condition  ot  a  community  without  any  law? 

11.  What  are  the  sources  of  the  law  in  this  country?    Outline  them 

in  order  of  time.    Outline  them  in  order  of  authority. 


CHAPTER  II 

THE  WRITTEN  LAW 

§  5.     Definition 

The  technical  term  "written  law"  means  law  that  is  em- 
bodied in  constitutions,  acts  of  Congre&s,  of  state  legislatures, 
and  of  other  bodies  with  legislative  authority.  In  many  coun- 
tries all  the  governing  law  is  this  so-ca'  'id  "written  law." 
Napoleon,  who  had  a  better  title  to  fame  in  the  code  of  laws 
to  which  his  name  is  attached  than  in  all  his  conquests,  called 
together  the  persons  most  learned  in  law  to  reduce  into  one 
orderly,  compact  body  all  the  varying  laws  at  that  time  pre- 
vailing in  France.  The  "Code  Napoleon"  which  was  the  result 
has  from  that  time  to  the  present  day  been  the  major  law  of 
France  and  is  what  we  call  "written  law."  No  similar  codifi- 
cation of  all  existing  laws  has  ever  been  attempted  in  the 
United  States,  and  our  so-called  "written  law"  is  only  a  part 
of  the  body  of  law  by  which  we  are  governed. 

§  6.     Constitutional  Government 

Nevertheless  in  our  country  the  written  constitution  is  the 
basis  of  all  law.  This  is  true  of  the  United  States  as  a  whole 
and  also  of  each  separate  state.  A  written  constitution  is  the 
fundamental  law  on  which  all  other  laws  are  based  and  to 
which  they  are  all  subject.  A  constitution  has  been  explained 
as  that  written  instrument  which  defines  the  powers  of  govern- 
ment and  limits  the  exercise  of  those  powers  for  the  protection 
of  individual  rights.  The  power  of  Congress  is  derived  from 
the  Constitution  of  the  United  States.  Each  state  legislature 
has  only  the  power  granted  by  the  state  constitution.     "Con- 

7 


8  THE  LAW  OF  THE  LAND 

gress  can  pass  no  laws  but  such  as  the  Constitution  authorizes 
expressly  or  by  clear  implication." 

§  7.    The  United  States  Constitution 

The  Constitution  of  the  United  States  is  the  highest  au- 
thority in  the  United  States.  Next  in  rank  come  laws  enacted 
by  Congress  in  pursuance  of  the  powers  enumerated  in  the 
Constitution.  For  example,  Congress  has  power  to  regulate 
commerce  with  foreign  nations  and  among  the  several  states, 
and  under  this  authority  it  has  passed  the  "Anti-Trust  Law." 
On  the  other  hand,  the  Constitution  does  not  grant  Congress 
any  legislative  power  in  regard  to  marriage  and  divorce,  and 
for  this  reason  Congress  is  not  authorized  to  enact  a  federal 
law  regulating  divorces,  however  desirable  such  a  uniform  law 
might  be.  Under  the  present  Constitution  this  matter  is  left 
to  the  discretion  of  the  separate  states,  and  divorce  laws 
change  as  state  lines  are  crossed. 

At  the  time  of  the  adoption  of  the  Federal  Constitution 
the  representatives  of  the  separate  states  were  every  whit  as 
jealous  of  the  rights  of  the  states  as  we  as  a  nation  were 
jealous  of  the  rights  of  the  United  States  in  the  matter  of  the 
League  of  Nations.  They  clung  to  the  sovereign  rights  of 
states  and  feared,  worse  than  men  ever  feared  war  and 
pestilence,  the  sinking  of  the  state  in  the  nation.  There  is  an 
extremely  interesting  parallelism  between  the  arguments  ad- 
vanced against  the  adoption  of  the  National  Constitution  by 
the  states  and  those  advanced  against  the  adoption  of  the  inter- 
national constitution  by  the  nation.  The  National  Constitution 
as  adopted  was  a  compromise  whose  makers  held  that  the 
powers  of  the  United  States  as  a  nation  were  to  be  limited,  so 
as  to  leave  to  the  separate  states  the  maximum  of  sovereignty. 
Their  purpose  in  drafting  the  Constitution  was  to  define  these 
limits  to  national  supremacy  with  exactitude  and  carefully  to 
mark  out  the  powers  of  Congress  beyond  which  it  could  not 


THE  WRITTEN  LAW  9 

go.  Fortunately,  grants  of  power  as  expressed  in  the  Con- 
stitution were  couched  in  general  language,  and  in  interpreting 
their  meaning  the  Supreme  Court  of  the  United  States  has, 
in  many  instances,  placed  a  liberal  construction  upon  them, 
so  that  Congress  today  is  a  far  more  powerful  body  than  it 
otherwise  would  have  been.  For  example,  at  the  time  the 
Constitution  was  adopted  no  one  dreamed  of  the  enormous 
power  granted  to  Congress  in  the  right  "to  regulate  commerce 
between  the  states."  The  commerce  between  the  states  at  the 
time  the  Constitution  was  adopted  was  of  little  significance 
and  the  power  to  regulate  was  of  small  moment.  With  the 
vast  extension  of  our  interstate  commerce,  however,  the  con- 
gressional power  of  regulation  has  grown  to  tremendous  pro- 
portions. The  recent  decision  of  the  Court  in  regard  to  the 
constitutionality  of  the  Adamson  railroad  wage  law  would 
seem  to  extend  this  power  almost  without  limit.  The  great 
war  necessitated  federal  control  of  the  railroads.  Even  though 
the  roads  are  returned  to  their  corporate  owners,  it  is  likely 
that  tliere  will  be  an  increased  supervision  by  the  central  gov- 
ernment that  will  vastly  and  permanently  expand  the  authority 
of  the  Federal  Government. 

The  wonderful  thing  about  the  Constitution  of  the  United 
States  is  that  though  it  was  devised  over  a  century  and  a 
quarter  ago,  and  though  the  changes  in  our  country  and  in  its 
modes  of  life,  in  its  social  relations,  and  in  its  methods  of 
business  have  been  tremendous,  the  old  Constitution,  with  but 
few  changes,  still  serves  as  the  fundamental  law  of  the  land 
and  chafes  in  but  few  places.  Well  did  Bryce  in  his  "American 
Commonwealth"  say  of  it : 

The  Constitution  of  1789  ....  after  all  deductions 
....  ranks  above  every  other  written  constitution  for  the 
intrinsic  excellence  of  its  scheme,  its  adaptation  to  the  cir- 
cumstances of  the  people,  the  simplicity,  brevity,  and  preci- 
sion of  its  language,  its  judicious  mixture  of  definiteness  in 
principle  with  elasticity  in  detail. 


lO  THE  LAW  OF  THE  LAND 

§  8.     Laws  of  Congress 

The  legislative  power  of  Congress  is  limited  to  specific 
objects  enumerated  in  the  Constitution,  Congress  has  the 
power  to  "regulate  commerce  with  foreign  nations  and  among 
the  several  states,  and  with  the  Indian  tribes,"  but  has  no 
power  to  pass  any  laws  affecting  a  railway  or  any  kind  of 
traffic  which  operates  entirely  within  a  single  state.  On  the 
other  hand,  Congress  is  authorized  to  "coin  money,  regulate 
the  value  thereof  and  of  foreign  coin,  and  fbc  the  standard  of 
weights  and  measures";  this  power  gives  us  a  system  of 
coinage  and  of  weights  and  measures  which  is  uniform  for  the 
entire  country.  If  ever  we  adopt  the  metric  system  it  will  be 
through  the  action  of  Congress,  under  this  constitutional  grant 
of  power. 

Whenever  Congress  acts  under  a  constitutional  grant  of 
power,  the  states  are  excluded  from  legislation  on  that  subject. 
For  instance.  Congress  has  power  to  pass  "uniform  laws  on 
the  subject  of  bankruptcy,"  and  when  the  present  bankruptcy 
law  was  passed  in  1898  it  at  once  nullified  all  the  existing  state 
laws  on  the  subject  of  insolvency.  Laws  passed  by  Congress 
in  pursuance  of  its  constitutional  powers  are  superior  to  state 
constitutions  and  state  laws. 

§9.     State  Constitutions 

At  the  time  of  the  adoption  of  the  National  Constitution, 
each  of  the  thirteen  original  states  was  exercising  the  powers 
of  government  under  some  form  of  written  constitution. 
These  instruments  remained  in  effect,  except  in  those  particu- 
lars which  were  overruled  by  the  Constitution  of  the  United 
States.  The  newer  states  have  adopted  constitutions,  and  be- 
fore the  states  were  admitted  it  was  necessary  for  Congress 
to  accept  the  proposed  constitutions.  But  within  the  limits  of 
each  particular  state  the  state  constitution  is  supreme.     The 


THE  WRITTEN  LAW  II 

State  legislature  cannot  enact  a  law  which  goes  counter  to  any 
of  the  provisions  of  the  state  constitution. 

§  10.     Constitutional  Amendments 

It  was  intended  by  those  who  framed  our  system  of  gov- 
ernment that  amendment  of  the  Constitution  of  the  United 
States  should  be  both  difficult  and  slow.  They  did  not  intend 
that  a  majority  of  the  voters  should  at  any  time  amend  the 
Constitution.  They  did  not  have  such  entire  confidence  in  the 
wisdom  of  the  common  people  as  to  be  willing  to  empower  a 
bare  majority  of  the  voters  to  set  aside  the  constitutional 
provisions  they  had  so  carefully  devised.  So  they  provided 
that  no  amendment  should  be  valid  as  a  part  of  the  Constitu- 
tion unless  it  were  first  proposed  by  two-thirds  of  both  Houses 
of  Congress  and  afterwards  ratified  by  three-fourths  of  the 
several  states.  As  it  was  purposely  made  difficult  to  amend 
the  United  States  Constitution,  so  most  of  the  states  have 
likewise  made  it  more  or  less  difficult  to  amend  or  to  change 
their  constitutions.  In  some  states  a  convention  for  the  special 
purpose  of  revising  the  constitution  is  called  at  stated  periods ; 
others  leave  to  the  legislature  the  calling  of  the  conventions, 
while  the  usual  plan  is  for  the  legislature  to  submit  separate 
amendments  to  the  people  from  time  to  time. 

§  II.     Constitutions  That  Legislate 

Constitutions  are  intended  to  be  permanent,  and  therefore 
should  lay  down  only  broad  principles.  They  should  not  be 
encumbered  with  legislation  on  any  subject  on  which  the  policy 
or  the  best  interests  of  the  people  are  likely  to  change.  The 
pressure  for  change  has  been  quite  as  strong  as  the  framers 
of  the  constitution  foresaw. 

At  the  present  time  many  persons  desiring  to  introduce 
reforms  and  to  secure  liberal  legislation  fret  at  the  delays  and 
the  difficulties  of  overcoming  constitutional  impediments,  and 


Ij2  THE  LAW  OF  THE  LAND 

hence  advocate  making  our  constitutions,  both  federal  and 
state,  easier  of  amendment  and  less  restrictive  in  their  pro- 
visions. There  is  such  a  distrust  today,  moreover,  of  the 
wisdom  of  legislatures  that  in  many  of  the  newer  state  con- 
stitutions provisions  have  been  incorporated  that  should  have 
been  left  for  legislative  action.  For  example,  the  Constitution 
of  Oklahoma  provides  that  eight  hours  shall  constitute  a  day's 
work  throughout  the  state;  that  railways  shall  not  charge 
passengers  more  than  two  cents  per  mile,  while  the  corporation 
commission  may  exempt  any  railway  in  case  its  earnings  are 
so  low  as  to  justify  a  higher  rate;  that  railways  shall  have 
adequate,  comfortable,  and  clean  stations,  etc.  By  incor- 
porating such  detailed  legislation  in  a  state  constitution,  its 
function,  which  is  to  provide  fundamental  and  basic  law,  is 
confused  with  that  of  the  legislature,  which  is  to  provide  laws 
for  such  specific  subjects  as  hours  of  labor,  rates  of  fare,  and 
all  sanitary  details. 

§  12.    Legislative  Enactments 

Next  in  dignity  and  authority  to  the  state  constitutions 
come  the  laws  or  acts  of  the  separate  state  legislatures  so  far  as 
they  conform  to  the  Constitution  of  the  United  States  and  the 
constitution  of  the  particular  state.  These  are  known  as 
statutes  and  are  of  authority  in  the  state  where  they  are  en- 
acted. Below  them  in  dignity  come  the  ordinances  or  laws 
of  boards  of  aldermen  and  common  councils  in  towns  and 
cities.  The  law  from  all  of  these  different  sources — constitu- 
tions, laws  of  Congress,  laws  of  legislatures,  and  ordinances 
of  municipal  governments — may  be  said  to  make  up  the  body 
of  what  is  called  the  "written  law,"  in  contradistinction  to 
what  we  call  the  "unwritten  law"  which  is  discussed  in  the 
next  chapter. 


THE  WRITTEN  LAW  13 

§  13.    Statute  Law 

The  term  "statute  law"  or  "statutory  law"  is  frequently 
used  in  contradistinction  to  the  common  law.  In  its  general 
use  it  means  all  law  expressed  in  constitutions,  codes  and  en- 
actments of  the  legislature,  and  is  identical  with  the  term 
"written  law"  as  used  herein.  In  a  narrower  sense  it  means 
the  legislative  enactments  of  the  states  or  of  the  United  States, 
which  are  published  in  volumes  of  statutes,  or  revised  statutes, 
as  "The  Revised  Statutes  of  the  State  of  New  York."  In  such 
a  work  will  be  found  all  the  laws  regulating  the  conduct  and 
activities  of  the  citizens  and  others  in  the  state. 

The  common  law  gives  way  whenever  it  comes  in  conflict 
with  the  statute  law.  The  legislature  in  each  state  has  au- 
thority to  supersede,  extend  or  abrogate  the  common  law. 
The  common  law  is  the  old  law  that  prevails  until  it  is  over- 
ruled by  statutes  of  the  United  States  or  of  a  state  legislature. 

§  14.    Subsidiary  Laws 

In  late  years  there  has  come  into  existence  an  immense 
additional  body  of  written  law  consisting  of  the  rules  and 
regulations  issued  by  boards  of  health,  building  boards,  school 
authorities,  and  various  bureaus  and  commissions.  For  in- 
stance, the  Interstate  Commerce  Commission  is  empowered  by 
Congress  to  regulate  particular  matters  concerning  the  rail- 
roads. In  most  of  the  states  there  are  railroad  commissions 
with  similar  authority  to  regulate  traffic  within  state  boun- 
daries. Moreover,  the  different  transportation  companies  and 
the  other  corporations  operating  public  utilities  have  the  right 
to  make  reasonable  regulations  for  the  government  of  those 
using  their  facilities.  Thus,  in  the  aggregate,  the  "written" 
or  "statutory"  law  comprises  a  vast  number  of  legal  and 
semi-legal  enactments,  from  articles  of  the  Constitution  down 
to  the  rules  of  the  trustees  of  the  smallest  school  district. 


14  THE  LAW  OF   THE  LAND 

Review  Questions 

1.  What  is  written  law? 

2.  What  is  a  constitutional  government? 

3.  Does  a  constitution  have  to  be  written? 

4.  What  is  meant  by  a  government  of  limited  powers? 

5.  What  is  the  highest  source  of  law  in  the  United  States? 

6.  How  have  powers  granted  by  the  constitution  been   extended 

from  time  to  time? 

7.  Why  cannot  Congress  give  us  a  system  of  uniform  divorce  laws  ? 

8.  Has   Congress    the   right   to    debar    from   interstate   commerce 

articles  made  by  child  labor  ?    Give  reason  for  your  answer. 

9.  Why  has  it  been  made  difficult  to  amend  our  constitution  ? 

10.  What  is  the  difference  between  matters  that  should  be  embodied 

in  a  constitution   and  matters  that   are   properly   subject  to 
legislative  action  ? 

11.  Name  in  order  of  authority  and  dignity  the  sources  of  "written 

law." 

12.  Why  has  New  York  State  a  constitution,  while  New  York  City 

has  not? 

13.  Name  some  congressional  laws  passed  within  recent  years. 

14.  What  laws  are  superior  to  a  state  constitution? 

15.  Name  some  laws  passed  by  the  legislature  of  your  state  within 

recent  years. 


CHAPTER  III 
THE  UNWRITTEN  LAW 

§  15.     Definition 

To  the  layman,  perhaps,  the  term  "unwritten  law"  is  some- 
what misleading.  It  is  called  unwritten  law  because  there  was 
a  time  when  it  was  not  written.  As  soon  as  men  commenced 
to  live  in  communities  they  found  it  necessary  to  conduct  their 
intercourse  and  dealings  according  to  rules,  and  these  customs 
or  uniform  methods  of  doing  things  are  supposed  to  be  the 
foundation  of  what  is  now  called  the  "common"  or  "unwritten 
law."  For  instance,  when  vehicles  meet  it  is  the  custom  in  this 
country  to  turn  to  the  right.  This  custom  is  not  the  enactment 
of  any  legislature,  and  yet  it  is  practically  a  law,  for  if  anyone 
driving  a  vehicle  failed  to  observe  it  he  would  be  liable  for  any 
damage  that  resulted.  It  might  be  possible  to  find  cases  where 
this  particular  matter  had  come  up  and  received  the  ratification 
of  a  court  decision,  but  in  such  cases  the  court  did  not  make 
either  the  custom  or  the  law;  it  merely  recognized  that  the 
custom  was  general  and  hence  had  the  force  of  law.  That  is, 
the  court  recognizes  the  custom  as  law,  because  men  have  acted 
in  one  way  until  that  way  has  become  a  rule  of  action;  the 
court  is  bound  by  it  although  there  is  no  written  record.  When 
so  recognized  by  a  court,  it  would  be  placed  upon  the  court 
records  and  so  would  actually  be  written  down,  yet  it  is  still 
called  "unwritten  law"  because  it  is  based  on  the  earlier  un- 
written custom  instead  of  upon  legislative  enactment.  Lawyers 
distinguish  these  classes  by  the  Latin  terms  lex  scripta — 
written  law — and  lex  non  scripta — unwritten  law. 

15 


1 6  THE  LAW  OF  THE  LAND 

§  1 6.    The  Doctrine  o£  Precedents 

The  courts  do  more  than  record  customs;  they  create  law 
by  decisions  that  then  become  precedents.  In  primitive  days 
when  men  had  differences  of  opinion  they  would  get  someone 
older  and  supposedly  wiser  than  the  rest,  to  arbitrate  or  decide 
the  matter.  When  a  given  matter  had  once  been  decided  in 
a  certain  way,  the  inhabitants  of  the  country  would  shape  their 
conduct  according  to  this  decision;  it  would  be  a  precedent 
for  future  action  and  future  decisions  and  in  this  way  would 
become  part  of  the  unwritten  law.  Gradually,  as  civilization 
increased  and  these  precedents  accumulated,  a  "body"  of  un- 
written law  grew  up,  founded  partly  on  customs  and  partly 
on  precedents  established  by  the  courts. 

Moreover,  if  a  question  came  before  one  of  these  early 
courts  and  no  custom  could  be  found  on  which  to  base  the 
decision  and  no  precedent  to  guide  it,  the  judge  would  decide 
according  to  his  ideas  of  right  and  justice  and  thus  would  add 
a  new  item  to  the  sum  of  this  unwritten  law,  which  in  turn 
would  become  a  precedent  for  later  cases  like  it.  England  has 
been  eulogized  by  its  poet  laureate  as: 

A  land  of  settled  government, 
A  land  of  old  and  fair  renown. 
Where  Freedom  broadens  slowly  down. 
From  precedent  to  precedent. 

§  17.     Court  Reports 

In  the  old  days  when  writing  was  a  rare  accomplishment, 
individual  lawyers  used  to  make  their  own  notes  of  cases  in 
what  were  called  "Common-Place  Books,"  which  they  would 
use  as  authorities  when  similar  cases  were  tried.  In  this  way 
there  grew  up  the  custom  of  making  court  reports.  Today 
the  decisions  of  the  courts  are  most  carefully  recorded  and 
published,  and  the  court  reports  are  the  greatest  repositories 
of  this  so-called  "unwritten  law." 


THE  UNWRITTEN  LAW  17 

§  18.     The  Volumes  of  Reports 

The  difficulty  in  our  country  at  the  present  time  is  that 
we  have  over  forty-eight  different  and  independent  systems  of 
courts,  all  grinding  out  decisions,  which  are  recorded  and 
published  in  long  rows  of  volumes.  In  the  first  place  the 
number  of  reports  has  become  so  great  that  it  is  impossible 
for  even  the  most  industrious  lawyer  to  keep  up  with  them. 
The  existing  law  reports  of  this  country  fill  thousands  of 
volumes,  and  every  year  they  are  growing  in  number  and 
complexity.  In  the  second  place,  there  are  forty-eight  separate 
jurisdictions,  the  decisions  do  not  always  harmonize,  and  then 
occurs  a  conflict  of  laws. 

Lawyers  depend  on  large  law  libraries  to  which  they  have 
access,  kept  up  usually  on  a  co-operative  basis.  Meanwhile, 
they  subscribe  for  volumes  of  digests  and  use  encyclopedias  of 
law  to  guide  them  in  their  searches  through  this  ever-increas- 
ing maze  of  judicial  decisions.  In  each  state  the  decisions  of 
the  highest  state  courts  are  paramount,  and  the  lawyers  in  the 
state  try  to  familiarize  themselves  with  at  least  the  trend  of 
these  decisions. 

Whenever  political,  economic,  and  social  conditions  change 
so  radically  that  the  decisions  of  the  higher  courts  become 
unjust  or  restrict  legitimate  activity  too  much,  the  state  legisla- 
ture interferes  and  enacts  laws  that  supersede  the  judicial 
decisions.  In  other  words,  the  written  law  prescribed  by 
the  legislature  overrules  the  unwritten  law  that  comes  from 
the  decisions  of  the  court. 

§  19.    Citations 

When  a  lawyer  wishes  to  use  a  case  in  argument,  he  cites 
it  by  naming  the  parties,  the  number  and  name  of  the  report, 
and  the  page  on  which  the  case  is  found.  Only  by  practice 
can  a  person  know,  when  a  case  reference  is  given,  what  court 


1 8  THE  LAW  OF  THE  LAND 

decision  the  author  cites.  It  is  no  small  part  of  a  lawyer's 
training  to  know  where  to  find  the  decision  he  wants.  This 
matter  of  finding  cited  cases  is  explained  in  Appendix  B. 

§  20.     The  Common  Law 

The  unwritten  law  was  also  called,  as  has  been  said,  the 
"common  law,"  and  old-school  lawyers  were  fond  of  extolling 
it  as  the  perfection  of  human  wisdom.  When  this  country 
broke  away  from  England  at  the  time  of  the  Revolution  we 
retained  the  English  common  law,  and  it  became  the  founda- 
tion of  the  general  system  of  law  prevailing  throughout  most 
of  this  country.  In  Louisiana,  however,  and  to  a  certain  ex- 
tent in  Texas  and  California,  the  so-called  Roman  or  "civil 
law"  was  introduced  and  became  largely  the  foundation  for 
the  systems  of  law  in  those  states.  This  system  based  on  the 
old  Roman  law,  prevails  in  Italy,  France,  and  other  Latin 
countries  in  Europe  and  is  utilized  by  the  Teutonic  peoples  as 
well.  The  English  law  is  indebted  to  the  Roman  system  more 
than  English  common  law  advocates  are  willing  to  admit,  and 
it  might  have  been  better  had  more  been  borrowed. 

The  original  English  common  law  was  a  harsh  and  bar- 
barous code,  having  little  or  no  consideration  for  the  rights 
of  women  and  children  and  making  man  the  tyrant  of  the 
family.  Any  infractions  of  its  provisions  were  punished  with 
drastic  penalties.  The  smallest  theft  by  man,  woman,  or  child, 
was  punished  by  death.  At  the  present  time  most  of  the 
harsher  features  of  the  common  law  have  been  eliminated. 
Juries  refused  to  convict  prisoners  on  account  of  the  cruel 
penalties,  and  the  law  has  been  modified  by  numberless  legisla- 
tive enactments  and  expanded  by  judicial  construction,  to  fit 
a  more  civilized  and  cultivated  society  than  that  in  which  it 
originated. 

It  is  evident  that  the  term  "unwritten  law"  covers  a  wider 
field  than  "common  law."     Therefore  it  is  used  in  this  work 


THE   UNWRITTEN  LAW  1 9 

to  designate  the  law  that  is  contained  in  the  reports  of  the 
courts. 

§  21.     Law-Merchant  and  Commercial  Law 

The  law-merchant  was  originally  a  part  of  the  general 
law  of  nations,  being  concerned  with  bills  of  exchange  and 
the  like,  freights,  average,  demurrage,  insurance,  bottomry  and 
other  matters  of  the  same  nature  pertaining  to  commerce. 

Chancellor  Kent  in  his  commentaries  says  that  the  law- 
merchant  "consists  of  certain  principles  of  equity  and  usages 
of  trade,  which  general  convenience  and  a  common  sense  of 
justice  had  established  to  regulate  the  dealings  of  merchants 
and  mariners  in  all  the  commercial  countries  of  the  civilized 
world." 

Blackstone  refers  to  it  as  "The  particular  system  of  cus- 
toms used  only  among  one  set  of  the  king's  subjects,  called 
the  custom  of  merchants,  or  lex  mercatoria:  which,  however 
different  from  the  general  rules  of  the  common  law,  is  yet 
ingrafted  into  it,  and  made  a  part  of  it;  being  allowed,  for 
the  benefit  of  trade,  to  be  of  the  utmost  validity  in  all  com- 
mercial transactions." 

While  the  law-merchant  had  its  origin  in  international 
usage,  as  a  matter  of  fact  it  was  incorporated  into  and  made 
a  part  of  the  body  of  the  common  law  of  England  and  was  with 
it  transplanted  to  this  country  and  made  a  part  of  our  own  com- 
mon law  so  far  as  it  was  applicable  to  our  conditions.  In  later 
years  it  has  been  largely  extended  and  modified  by  statute  but 
still  remains  part  of  our  unwritten  law  and  as  such  governs 
in  the  present  course  of  trade  and  business. 

The  term  law-merchant  is  generally  applied  to  the  old  laws 
or  customs  of  merchants.  The  corresponding  modern  term 
is  commercial  law,  which  is  defined  as  the  body  of  principles 
and  rules,  drawn  chiefly  from  the  customs  of  merchants,  by 
which  the  rights  and  obligations  arising  in  commercial  transac- 


20  THE  LAW  OF  THE  LAND 

tions  are  determined.     It  Is  also  defined  simply  as  the  law 
applicable  to  commercial  transactions. 

§  22.     Unconstitutional  Laws 

It  frequently  happens  that  a  legislative  enactment  designed 
to  overrule  some  objectionable  decision  of  the  courts  comes 
into  conflict  with  a  provision  of  the  state  constitution  or  of  the 
United  States  Constitution  and  the  courts  may  decide  this  new 
law  to  be  unconstitutional.  If  the  people  in  the  state  should 
still,  desire  to  maintain  the  legislative  enactment,  they  would 
have  to  amend  the  state  constitution  except  in  states,  Colorado 
for  example,  whose  constitution  provides  for  the  "recall  of 
judicial  decisions"  by  the  vote  of  the  people.  So  far  as  the 
writer  knows,  however,  this  power  has  never  been  invoked, 
and  indeed  it  seems  a  dangerous  right  since  popular  passion 
might  easily  be  swayed  to  commit  on  occasion,  in  this  way, 
great  injustice.  In  case  the  law  were  in  conflict  with  the 
Constitution  of  the  United  States,  the  people  must  either 
submit  or  else  undertake  the  very  arduous  task  of  stirring  up 
all  the  people  in  the  country  to  amend  the  Federal  Con- 
stitution. 

A  notable  instance  of  this  is  the  income  tax  law,  which 
was  passed  by  Congress  but  declared  unconstitutional  by  the 
Supreme  Court.  Then  the  Constitution  was  amended,  where- 
upon Congress  passed  the  present  income  tax  law  which,  with 
its  amendments,  will  doubtless  be  a  permanent  feature  of  our 
system  of  taxation. 

§  23.    The  Recall  of  Judges 

Within  the  last  few  years  many  persons  have  become  im- 
patient with  the  slow  process  of  changing  the  Constitution. 
This  has  led  them  to  advocate,  as  a  short  cut  to  securing  better 
laws,  the  recall,  that  is,  the  dismissal,  of  any  judges  who  decide 
that  popular  laws  are  unconstitutional.    If  this  law  went  into 


THE  UNWRITTEN  LAW  21 

effect  any  judge  who  rendered  decisions  opposed  by  the  major- 
ity of  the  voters  could  be  recalled  and  a  more  subservient 
arbitrator  elected.  For  several  reasons  such  a  procedure  seems 
unwise.  It  would  be  better  to  facilitate  the  process  of  amend- 
ing the  Constitution  than  to  seek  judges  who  will  disregard 
the  plain  letter  of  existing  law  and  will  support,  as  legal,  laws 
that  plainly  are  not  in  harmony  with  the  provisions  of  the 
Constitution.  But  this  is  too  large  a  subject  for  treatment 
here. 


Review  Questions 

1.  Give  some  examples  of  custom-made  law. 

2.  When  a  custom  is  recognized  by  a  court  and  its  decision  is 

recorded,  what  is  the  efifect? 

3.  What  is  the  argument  for  observing  precedents? 

4.  What  is  the  disadvantage  of  our  numerous  volumes  of  reports  ? 

5.  In  what  cases  do  legislative  enactments  supersede  court  deci- 


sions 


6.  Give  the  arguments  for  and  against  the  recall  of  judges. 

7.  What  is  the  relation  between  the  common  law  and  statute  law? 

8.  Where  do  we  get  our  common  law? 

9.  What  countries  have  laws  most  nearly  like  ours? 


CHAPTER  IV 

LAW  AND  EQUITY 

§  24.     Remedial  Law 

When  anyone  has  suffered  wrong  and  his  legal  rights  have 
been  infringed,  he  seeks  a  remedy.  The  law  itself  may  be 
ideal,  but  if  the  machinery  to  enforce  the  rights  defined  by 
the  law  be  defective,  abstract  perfection  will  avail  but  little. 
Therefore  a  study  of  what  is  called  remedial  law  is  necessary 
before  we  can  tell  what  real  help  we  are  likely  to  obtain  from 
the  law.  The  "law's  delay"  is  proverbial.  In  all  matters  of 
judicial  procedure  there  has  always  been  a  tendency  to  formal- 
ity and  "red  tape."  Too  often  this  tendency  becomes  so  ex- 
cessive that  it  nullifies  the  remedy  and  results  in  a  denial  of 
justice.  The  remedy  may  be  so  costly  and  long  deferred  that 
it  were  better  left  unsought.  The  man  with  limited  means  is 
too  often,  on  this  account,  barred  from  seeking  justice. 

Suits  or  actions  to  redress  wrongs  or  to  enforce  rights  are 
classified  as  suits  at  law  and  suits  in  equity.  It  is  not  easy  to 
explain  briefly  the  distinction  between  the  terms  "law"  and 
"equity"  as  they  are  used  in  our  administration  of  justice. 
The  two  words  are  used  in  this  connection  without  any  refer- 
ence to  the  ordinary  meaning  attached  to  them.  A  real, 
technical  distinction  exists  between  a  case  at  law  and  a  case 
in  equity  which  a  lawyer  must  thoroughly  understand. 
Whether  it  would  pay  a  business  man  to  study  out  the  exact 
and  full  distinction  between  the  two  is  doubtful.  But,  as  it  is 
impossible  for  a  lawyer  to  avoid  using  the  terms  in  their 
technical  sense,  it  is  important  that  the  layman  should  have 
a  general  idea  of  what  the  lawyer  means,  so  that  the  plain 

22 


LAW  AND  EQUITY  23 

man  may  not  be  misled  by  confusing  the  ordinary  English  use 
of  the  words  with  the  legal  signification. 

§  25.     Equity  in  the  Legal  Sense 

In  England  many  years  ago  the  proceedings  at  law  had 
become  so  cumbersome  and  so  limited  in  scope  that  it  was 
difficult  to  obtain  justice  in  the  courts  of  common  law.  King 
Henry  VII  then  provided  that  in  those  cases  in  which  the 
common  law  did  not  afford  a  remedy,  relief  could  be  obtained 
by  applying  directly  to  his  chancellor.  This  official,  who  was 
also  a  dignitary  of  the  church,  favored  the  Roman  or  civil 
law  and  adopted  a  procedure  founded  on  that  law  in  contra- 
distinction to  the  common  law.  Such  a  procedure  before  the 
chancellor  was  called  a  suit  in  "chancery"  or  "equity,"  as  dis- 
tinguished from  the  procedure  "at  common  law"  or  simply 
"at  law."  It  should  be  noted,  however,  that  while  at  first  it 
was  simpler  to  bring  a  suit  in  equity  than  at  law,  this  dis- 
tinction soon  vanished  and  equity  proceedings  became  even 
more  complex  and  technical  than  the  procedure  at  law.  The 
chancellor,  however,  gave  relief  in  many  cases  for  which  the 
common  law  gave  no  remedy.  The  common  law  was  adapted 
to  a  simple  life  and  a  crude  social  system.  As  the  English 
people  advanced  the  deficiencies  of  the  common  law  were 
manifest  and  the  introduction  of  the  courts  of  equity  was  a 
long  step  in  legal  reform.  The  two  distinct  systems  both  con- 
tinued; the  procedure  was  different,  the  rules  were  different, 
and  the  relief  given  was  different.  The  lawyers  who  practiced 
before  the  chancellor  were  called  solicitors;  the  lawyers  who 
appeared  in  the  common  law  courts  were  counselors  or 
barristers. 

In  equity  the  remedies  are  different  from  those  provided 
by  a  suit  at  law.  To  illustrate  the  difference,  if  anyone  breaks 
down  your  fences  and  makes  a  road  across  your  property,  at 
laiu  you  can  sue  only  for  damages;  in  equity  you  can  ask  an 


24  THE  LAW  OF  THE  LAND 

injunction  restraining  the  offender  from  further  trespass,  and 
also  recover  for  any  damage  he  may  have  done. 

§  26.     Suits  at  Law  and  in  Equity 

The  distinction  between  law  and  equity  was  brought  to  this 
country  and  as  a  result  there  are  in  all  the  states  the  two 
divisions  of  the  work  of  the  courts  and  the  two  methods  of 
bringing  suit.  In  a  few  states  the  law  and  the  equity  courts 
are  kept  entirely  separate,  as  is  the  case  in  New  Jersey;  and 
in  these  states  the  public  realizes  more  readily  the  real  dif- 
ference between  law  and  equity  administration.  But  in  most 
states  today,  the  actions  are  brought  in  the  same  courts,  the 
only  differences  being  in  the  preliminary  procedure,  in  the 
remedies  which  the  courts  grant,  and  in  the  fact  that  in  most 
cases  at  law  there  is  a  jury  trial,  while  in  equity  cases  a  judge 
or  judges  alone  hear  the  case. 

A  court  of  law  hears  both  civil  and  criminal  cases.  Civil 
cases  are  the  ordinary  suits  about  contracts  and  property  rights 
and  are  brought  by  private  parties  against  other  private  parties. 
Criminal  cases  are  suits  brought  by  the  state  itself  against 
those  who  are  accused  of  having  broken  the  law,  and  who 
are  punishable  by  fine  or  imprisonment.  In  such  a  case  the 
fine  goes  to  the  state.     (See  Chapter  V.) 

A  court  of  equity  hears  only  civil  cases.  If  a  person  is 
interfering  with  another's  rights,  a  court  of  equity  will  grant 
an  injunction  forbidding  him  to  do  so  in  the  future,  and  will 
at  the  same  time  make  him  pay  damages  to  the  injured  party 
for  the  wrong  which  has  already  been  done. 

§  27.     Bringing  a  Suit  at  Law 

When  A  refuses  to  pay  a  debt  that  is  due,  or  fails  to  do 
what  he  has  contracted  to  do,  or  by  his  negligence  or  wrong- 
doing has  caused  damage  to  B,  if  B  wishes  to  bring  suit  against 
A  he  employs  a  lawyer  who  prepares  a  written  statement 


LAW  AND  EQUITY  25 

setting  forth  his  client's  cause  of  action.  This  paper  is  called 
a  complaint  and  must  be  served  upon  A.  At  the  same  time 
with  or  before  the  service  of  the  complaint,  B  must  serve  a 
notice  or  summons  on  A  requiring  him  to  answer  within  a 
certain  number  of  days.  If  A  does  not  appear,  the  court  will 
consider  that  A  does  not  mean  to  defend  and,  in  some  in- 
stances, if  the  claim  is  definite,  it  will  grant  a  judgment  by 
default  against  A  and  in  favor  of  B,  without  a  trial  or  any- 
thing more  than  a  sworn  complaint  to  prove  the  case. 

Service  of  a  summons  must  be  made  personally  upon  a 
defendant  except: 

1.  Where  the  person  is  an  infant,  it  may  be  delivered 

to  a  parent  or  guardian. 

2.  Where  the  person  is  adjudged  insane  or  incompetent 

to  manage  his  own  affairs,  it  may  be  delivered  to 
a  guardian  or  to  the  defendant. 

3.  Where  a  person,  firm,  or  corporation  is  without  the 

state,  summons  may  be  served  by  publication  of 
the  summons  in  two  newspapers,  most  likely  to  be 
seen  by  the  defendant,  for  a  specified  time  of  not 
less  than  once  a  week  for  six  successive  weeks, 
(The  details  given  are  for  publication  in  New 
York.     They  vary  in  the  different  states.) 

The  party  bringing  the  action  is  called  the  "plaintiff,"  or 
in  some  states  the  "complainant."  The  party  against  whom 
the  action  is  brought  is  called  the  "defendant."  If  the  de- 
fendant does  not  wish  to  allow  judgment  to  go  against  him  by 
default,  he  or  his  lawyer  must  within  the  time  set  serve  an 
answer  to  the  other  party's  complaint  against  him.  In  this 
paper  the  defendant  usually  brings  forward  any  cause  of  action 
which  he  may  have  against  the  other  party.  This  is  called  a 
counterclaim.  The  written  papers  by  which  the  parties  bring 
their  cause  before  the  court  are  called  "pleadings."     If  the 


26  THE  LAW  OF  THE  LAND 

defendant  denies  the  facts  alleged  or  sets  up  a  counterclaim, 
the  pleading  is  called  an  answer. 

The  other  party  then  replies  to  the  counterclaim.  There 
may  in  some  states  be  several  such  replies  after  the  service  of 
the  complaint.  The  procedure  depends  on  the  law  of  the 
particular  state  where  the  action  is  being  brought.  Each  party 
must  serve  a  copy  of  each  paper  in  the  action  on  the  other 
party  or  his  attorney. 

If  what  has  been  stated  in  the  complaint  does  not  make 
a  legal  cause  of  action,  the  defendant  through  his  lawyer  may 
object  to  it  by  filing  a  demurrer.  A  demurrer  objects  to  the 
complaint  on  legal  grounds ;  for  example,  that  it  is  not  brought 
in  the  right  court,  or  that  the  facts  alleged,  even  if  true,  do 
not  constitute  a  cause  of  action. 

Then  the  matter  of  the  demurrer  comes  up  before  the 
court.  It  is  argued  by  the  lawyers  on  each  side,  and  if  the 
court  decides  that  the  demurrer  presented  by  the  defendant  is 
well  taken,  the  complaint  is  dismissed.  The  plaintiflf  can  then 
usually  get  leave  (by  paying  the  costs  up  to  date)  to  file  a  new 
complaint  in  which  his  lawyer  will  try  to  avoid  the  particular 
legal  difficulty. 

If  the  court  decides,  however,  that  the  demurrer  is  not 
well  taken,  it  is  dismissed,  and  this  leaves  the  defendant  to 
answer  the  complaint  as  to  the  facts,  that  is,  as  to  the  matters 
which  have  been  alleged  on  the  part  of  the  plaintifif  and  denied 
on  the  part  of  the  defendant. 

The  foregoing  statement  of  proceedings  before  trial  pre- 
supposes very  simple  proceedings,  but  usually  there  are  re- 
quests to  amend  and  much  incidental  procedure,  which  tend 
to  delay  the  trial  of  the  main  issue. 

§  28.     Trial  at  Law 

When  the  parties  have  finally  come  to  an  issue,  i.e.,  when 
the  plaintiff  has  alleged  certain  things  and  the  defendant  has 


LAW  AND  EQUITY  27 

denied  them  or  has  interposed  a  defense,  then  the  case  is  set 
down  for  trial,  and  takes  its  place  on  the  court  calendar. 
When  cases  that  are  ahead  of  it  on  the  calendar  have  been 
tried,  or  postponed,  the  case  is  called,  and  the  lawyers  on  each 
side  are  asked  if  they  are  ready.  When  both  sides  are  ready, 
or  have  no  excuse  for  longer  delay,  a  jury  is  assembled  and 
the  judge  proceeds  with  the  case.  In  a  court  of  law  a  party 
has  a  right  to  have  a  jury  decide  any  disputed  facts. 

The  witnesses  for  each  side  are  sworn  and  testify,  then 
the  case  is  argued  by  counsel  for  each  party  and  goes  to  a  jury 
to  decide  or  is  decided  by  the  judge,  or  is  taken  under  advise- 
ment by  the  judge,  who  will  give  his  decision  after  due  con- 
sideration. If  the  case  goes  to  a  jury,  the  jurymen  are  placed 
in  the  custody  of  a  court  officer  until  they  reach  a  decision 
or  find  that  they  cannot  agree.  If  the  judge  is  to  decide  the 
case  and  takes  it  under  advisement,  it  may  be  days,  weeks,  or 
months  before  he  will  render  his  decision. 

Since  a  jury  is  composed  of  human  beings,  it  is  likely  to 
show  certain  very  human  characteristics  in  its  decisions.  The 
sympathies  of  the  jury  are  usually  with  the  under  dog,  whether 
he  is  plaintiff  or  defendant.  Often  the  plaintiff,  by  the  mere 
fact  of  going  to  court  with  his  troubles  and  then  by  being 
heard  first,  has  the  better  chance.  If  one  party  is  a  corpora- 
tion, the  jury  is  inclined  to  regard  it  as  a  soulless  oppressor, 
and  to  award  damages  in  favor  of  the  poor  workingman, 
widow,  etc.,  whom  the  corporation  is  supposed  to  be  injuring. 

Very  frequently  clever  and  unscrupulous  lawyers  get  in 
some  touch  to  appeal  to  the  sympathies  of  the  jury,  as  a  photo- 
graph of  an  injured  man's  wife  and  children,  etc.  These  are 
usually  ruled  out  by  the  court,  but  the  effect  on  the  jury  has 
been  gained  just  the  same.  It  is  to  be  remembered  that  if  one 
man  on  the  jury  is  stubborn,  prejudiced,  or  dishonest,  he  can 
prevent  a  verdict  and  the  whole  expense  and  trouble  of  the 
trial  has  to  be  repeated.    The  law  frequently  breaks  down  in 


28  THE  LAW  OF  THE  LAND 

vindicating  rights  because  of  the  imperfect  workings  of  the 
jury  system. 

Note: 

I.     Consider  all  the  chances  before  bringing  a  lawsuit. 

§  29.    Bringing  a  Suit  in  Equity 

The  outline  given  applies  to  a  court  of  law.  If  the  court 
is  a  court  of  equity  jurisdiction,  the  procedure  is  essentially 
the  same  except  that  the  first  statement  may  be  called  a  peti- 
tion or  a  bill  in  equity.  In  New  York  complaints  are  also 
used  in  equity.  All  procedure  in  courts  follows  generally  the 
lines  laid  down,  with  many  variations  as  to  details  and  inci- 
dentals. 

A  suit  in  equity  can  be  brought  only  when  the  party  cannot 
obtain  justice  at  law.  The  other  party  must  answer  the  peti- 
tion or  the  bill.  Copies  of  all  papers  must  be  served  on  the 
opposite  party  by  the  party  making  the  charges. 

In  a  suit  in  equity,  only  a  judge,  or  several  judges,  hear  the 
case.  For  this  reason  a  court  of  equity  is  not  so  strict  about 
keeping  out  evidence  that  does  not  properly  have  anything  to 
do  with  the  case,  or  that  might  prejudice  a  jury.  The  judge  is 
supposed  to  know  the  law  and  to  be  guided  only  by  such  evi- 
dence as  ought  to  be  allowed  to  affect  the  decision  of  the  case. 

A  court  of  equity  tries  to  give  a  remedy  to  fit  the  nature 
of  the  wrong  that  is  being  done.  If  the  wrong  consists  in  a 
refusal  to  perform  a  contract,  the  court  will,  in  some  instances 
where  the  contract  should  be  performed,  compel  the  offending 
party  to  carry  out  his  agreement.  (See  Chapter  XII.)  If  the 
wrong  alleged  consists  in  the  defendant's  continuing  to  do 
anything  which  is  injuring  another,  the  court  will  issue  wha* 
is  called  an  injunction  forbidding  the  continuance  of  the  in- 
jurious conduct.  Practically  speaking,  however,  the  courts  are 
chary  of  granting  an  injunction  where  it  may  be  avoided. 

It  is  useless  to  attempt  to  bring  an  action  in  equity  unless 


LAW  AND  EQUITY  29 

the  party  is  certain  that  he  can  prove  to  the  court  that  the 
damages  which  he  can  obtain  at  law  will  not  compensate  him 
for  his  injury,  and  unless  he  is  willing  to  do  everything  which 
the  court  may  require  from  him  in  the  interests  of  justice. 
The  maxim  is  that  he  who  seeks  equity  must  do  equity. 

Another  maxim  in  equity  is  that  he  who  comes  into  a  court 
of  equity  must  come  with  clean  hands,  i.e.,  if  the  complainant 
alleges  fraud,  he  must  show  that  he  has  been  scrupulously  fair 
in  all  his  own  dealings. 

If  the  party  resorts  to  equity  when  he  should  have  in- 
stituted an  action  at  law,  he  will  merely  find  that  he  is  obliged 
to  go  to  the  added  expense  of  bringing  action  at  law.  The 
practice  in  equity  is  no  less  complicated  than  that  at  law. 

§  30.    Appeals  to  a  Higher  Court 

The  decision  of  a  trial  may  be  appealed  from  by  the  dis- 
satisfied party.  The  unsuccessful  litigant  has  to  pay  the  dam- 
ages adjudged  to  be  due  his  opponent,  the  costs  of  the  suit,  and 
the  fees  of  his  own  lawyer.  His  fighting  blood  is  stirred  by 
the  evidence  that  brings  to  mind  the  original  dispute  and  the 
perverseness  of  the  opposite  party,  by  the  arguments  of  the 
counsel  on  each  side,  and  by  the  failure  of  the  court  and  jury 
to  give  them  the  weight  he  feels  they  have,  and  he  feels  as  if 
he  would  spend  all  he  has  to  vindicate  himself  and  to  punish 
those  who  have  wronged  him. 

His  lawyer  feels  much  the  same  way,  and,  as  he  is  paid 
for  appealing  instead  of  having  to  pay,  he  can  better  afford  to 
indulge  his  feelings.  Usually  the  first  thing  is  to  file  excep- 
tions to  the  alleged  irregularities  in  the  trial ;  that  is,  happen- 
ings of  the  following  nature: 

That  evidence  was  admitted  which  should  have  been  shut 
out. 

That  evidence  was  rejected  which  should  have  been  ad- 
mitted. 


30  THE  LAW  OF  THE  LAND 

That  questions  were  allowed  which  should  have  been 

barred. 
That  questions  were  disallowed  which  should  have  been 

allowed. 
That  the  judge  charged  the  jury  in  a  way  he  should  not 

have  charged  it. 
That  the  judge  refused  to  charge  the  jury  as  requested 

and  as  he  should  have  charged  it. 
That  the  verdict  was  excessive,  or  inadequate,  or  not 

supported  by  the  evidence. 

Then  a  motion  is  made  for  a  new  trial  and,  if  this  is 
overruled,  counsel  announces  that  he  will  appeal.  The  losing 
party  cannot  commence  a  new  action.  He  is  barred  from  any 
such  proceeding,  otherwise  a  wealthy  plaintiff  could  ruin  his 
opponent  by  continued  new  actions.  He  can,  though,  in  most 
cases  appeal  to  a  higher  court. 

The  appeal  is  a  costly  and  complicated  proceeding.  All 
of  the  papers  and  much,  in  some  cases  all,  of  the  evidence 
must  be  printed.  Then  the  arguments  of  each  of  the  opposing 
counsel,  ironically  termed  "briefs,"  are  printed.  After  more 
delay  and  often  much  sparring  of  counsel  over  points  of 
procedure,  the  case  will  take  its  place  on  an  appeal  docket  and 
in  due  course  will  be  reached  by  the  appellate  court.  Next 
the  case  is  heard,  which  means  that  counsel  for  both  sides 
appear  and  argue  the  case  on  appeal.  Finally  the  court  takes 
it  under  consideration  and  if  a  new  trial  is  granted  it  must 
be  tried  again  in  the  original  court.  In  most  states  there 
may  be  indefinite  appeals  until  the  case  has  reached  the  court 
of  last  resort,  been  decided  there  on  the  last  technicality,  and 
a  rehearing  has  been  asked  for  and  refused.  There  is  always 
delay  between  appeals,  and  it  is  entirely  possible  for  a  law- 
suit to  go  on  for  years  and  become  an  heirloom,  which  is 
handed  on  from  generation  to  generation.     It  will  be  seen 


LAW  AND  EQUITY  3 1 

that  the  person  or  the  corporation  with  the  longest  purse  has 
a  great  advantage.  Such  a  one  can  employ  more  experienced 
and  abler  counsel  and  can  stand  the  mounting  costs  better  than 
the  person  who  has  nothing  but  a  just  cause. 

Attempts  have  been  made  from  time  to  time  to  simplify 
procedure  and  to  make  litigation  less  costly  and  less  dilatory, 
but  so  far  without  any  great  measure  of  success.  To  laymen 
both  courts  and  counsel  often  appear  much  more  concerned 
in  observing  the  rules  of  the  game  than  in  administering 
justice  as  between  man  and  man.  As  stated  in  one  of  our  legal 
periodicals:  ^ 

While  every  other  profession  has  been  practically  made 
over  in  the  past  twenty-five  years,  the  conservatism  of  the 
legal  profession  has  stood  in  the  way  of  substantial  changes 
in  the  rules  of  procedure  and  practice. 

Elihu  Root,  in  the  foreword  to  "Justice  and  the  Poor" 
states : 

We  have  had  in  the  main  just  laws  and  honest  courts  to 
which  people — poor  as  well  as  rich — could  repair  to  obtain 
justice.  But  the  rapid  growth  of  great  cities,  the  enormous 
masses  of  immigrants  (many  of  them  ignorant  of  our 
language),  and  the  greatly  increased  complications  of  life 
have  created  conditions  under  which  the  provisions  for  ob- 
taining justice  which  were  formerly  sufficient  are  sufficient 
no  longer.  I  think  the  true  criticism  which  we  should  make 
upon  our  own  conduct  is  that  we  have  been  so  busy  about 
our  individual  affairs  that  we  have  been  slow  to  appreciate 
the  changes  of  conditions  which  to  so  great  an  extent  have 
put  justice  beyond  the  reach  of  the  poor. 

Ex-President  Taft,  in  an  address  before  the  Virginia  Bar 
Association,  said: 

Of  all  the  questions  which  are  before  the  American 
people,  I  regard  no  one  as  more  important  than  the  improve- 


'  Case  &  Comment  for  July,   1917. 


32  THE  LAW  OF  THE  LAND 

ment  of  the  administration  of  justice.  We  must  make  it  so 
that  the  poor  man  will  have  as  nearly  as  possible  an  equal 
opportunity  in  litigating  as  the  rich  man,  and  under  present 
conditions,  ashamed  as  we  may  be  of  it,  this  is  not  the  fact. 

Note: 

I.     Before  becoming  involved  in  litigation  reckon  the 
cost,  to  the  limit  of  the  last  appeal. 

§  31.    Advisability  of  Litigation 

There  are  circumstances  under  which  it  is  necessary  to  go 
to  law,  and  then  its  advisability  is  not  open  to  discussion. 
Such  circumstances  may  be  compared  with  cases  in  which 
surgical  operations  have  become  imperative.  The  only  ques- 
tion then  is  to  be  sure  that  you  secure  a  skilful  attorney  to 
represent  you.  But  many  cases  arise  where  there  is  strong 
temptation  to  bring  suit,  but  where  it  might  be  more  prudent 
to  compromise  or  settle  by  other  means.  What  follows  applies 
to  these  debatable  cases. 

When  you  feel  that  you  have  been. wronged  and  consult 
a  lawyer,  you  want  him  to  sympathize  with  you,  to  assure 
you  of  the  merits  of  your  case,  and  to  advise  you  to  show 
the  other  party  that  he  cannot  ride  rough-shod  over  you. 
This  is  the  lawyer's  selling  talk  that  you  expect.  You  tell 
him  to  go  ahead  and  cheerfully  give  him  a  check  for  a  few 
hundred,  which  he  says  will  be  plenty  to  keep  things  moving 
until  the  case  comes  to  trial. 

If  instead,  he  tells  you  judicially  that,  while  you  have  a 
good  case,  it  will  save  time  and  money  to  compromise  in 
some  way  rather  than  to  litigate,  you  take  it  as  an  unfriendly 
act,  grudge  him  his  modest  fee  for  saving  you  a  lawsuit,  and 
tell  your  friends  that  he  is  too  cautious  ever  to  make  much 
at  the  bar.  Next  time  you  have  trouble  you  think  you  will 
find  a  lawyer  with  a  little  more  "sand." 

Lawyers  know  that  most  men  who  consult  them  feel  this 


LAW  AND  EQUITY  33 

way.  As  one  lawyer  expressed  himself,  it  is  easier  to  get 
a  $1,000  fee  for  trying  a  case  than  $100  for  effecting  a  com- 
promise. Therefore  do  not  expect  that  your  lawyer  is  going 
to  punish  himself  to  do  you  an  unwelcome  service.  You  can 
try  this  plan: 

Ask  your  lawyer  to  make  you  an  estimate  of  what  the 
case  will  be  likely  to  cost  in  counsel  fees,  preparation  for 
trial,  court  costs,  and  incidentals.  Then  inquire  as  to  what 
amount  of  your  time  will  be  required  for  consultation,  attend- 
ance on  trial,  waiting  for  the  case  to  be  called,  etc.  Estimate 
what  your  time  is  worth  in  your  business  and  add  to  the 
previous  amount.  Estimate  how  much  thought  and  worry 
you  will  put  into  it  and  how  much  this  will  detract  from  your 
business  efficiency.  Assume  you  get  judgment  in  your  favor 
and  the  case  is  not  appealed.    How  does  the  account  stand  ? 

You  may  have  a  good  case  and  still  lose  out.  Such  things 
have  happened.  Appeals  are  possibilities.  There  is  a  chance 
of  heavy  costs  and  fees.  Consider  all  eventualities  before  you 
decide  on  your  course. 

Notes: 

1.  Prevention  is  better  than  cure.     "Beware  of  en- 

trance to  a  quarrel." 

2.  Calculate  your  costs  in  advance.     This  discourages 

litigation. 

3.  Tell  your  lawyer  you  would  rather  pay  him  to  keep 

you  out  of  litigation  than  to  win  your  case.  If 
he  is  young  at  the  business  he  may  take  you  at 
your  word. 


Suggestions  to  Readers 

If  possible,  attend  the  trial  of  a  civil  case  before  a  magistrate. 
This  is  the  court  where  suits  for  small  sums  are  brought ;  its  processes 
are  simple  and  rapid.    But  its  procedure  is  typical.    Note  the  function 


34  THE  LAW  OF  THE  LANI> 

of  the  magistrate,  the  counsel,  the  constable,  marshal,  or  other  officer 
of  the  court.  Note  how  witnesses  are  called,  sworn,  examined, 
cross-examined.  Note  the  arguments  of  counsel.  Then  answer  these 
questions : 

1.  After  hearing  the  witnesses,  how  would  you  have  decided 

the  case? 

2.  After  hearing  the  lawyers  argue,  would  you  have  decided 

otherwise  ? 

3.  Was  the  actual  decision  just? 

4.  Allowing  fair  rates  of  payment  for  the  time  of  the  men 

engaged  in  the  trial,  for  the  judge,  constable,  parties, 
lawyers,  and  witnesses,  how  much  did  the  trial  cost  the 
community?  What  was  the  amount  involved  in  the 
litigation  ? 

5.  Was  the  suit  a  fair  average  as  to  time,  amount  involved, 

number  in  attendance,  etc? 

6.  Could  you  devise  any  better  system  for  settling  disputes? 


Review  Questions 

1.  Why  is  legal  process  to  redress  a  wrong  usually  unsatisfactory? 

2.  What  is  the  distinction  between  "law"  and  "equity"  ? 

3.  In  your  state  are  there  separate  courts  of  law  and  equity? 

4.  Can  suit  be  brought  against  a  person  without  giving  him  notice  ? 

5.  What  is  the  object  of  the  procedure  in  a  suit  before  trial? 

6.  What  defects  are  there  in  trial  by  jury? 

7.  If  you  were  party  to  a  suit,  would  you  rather  have  it  decided 

by  a  jury  or  by  a  judge?     Why? 

8.  If  a  party  fails  to  get  a  verdict  or  decision  can  he  bring  a 

new  suit? 

9.  What  could  be  done  to  make  justice  cost  less  in  time  and  money? 

Can  you  suggest  any  method  of  judicial  reform? 
ID.     Should  a  lawyer  advise  litigation  or  compromise?     What  cir- 
cumstances should  influence  his  advice? 


CHAPTER  V 

CRIMINAL  LAW 

§32.    Criminal  Procedure 

Criminal  law  is  administered  in  a  manner  different  from 
the  usual  procedure  at  law  and  in  equity.  The  state  prose- 
cutes for  crime,  and,  while  the  accused  person  is  called  the 
defendant,  there  is  no  plaintiff  save  the  state.  The  designa- 
tion of  a  criminal  case  might  be :  "State  of  Ohio  v.  John  Doe 
(name  of  accused)."  In  the  different  states  there  is  more 
or  less  variation  in  the  administration  of  criminal  law. 

Criminal  prosecutions  are  usually  instituted  by  a  warrant 
sworn  to  by  the  aggrieved  party  before  a  magistrate.  The 
magistrate  then  summons  the  accused  person  to  appear  or 
issues  a  warrant  for  his  arrest.  In  minor  cases  the  magistrate 
tries  the  person,  or  in  some  instances  the  accused  may  demand 
a  trial  by  jury.  Where  the  offense  is  serious,  the  magistrate 
has  only  jurisdiction  to  commit  the  accused  to  await  the 
action  of  the  grand  jury.  In  most  cases  the  accused  person 
is  allowed  to  give  bail  to  insure  his  appearance  when  the  grand 
jury  meets. 

Serious  crimes  must  always  be  prosecuted  by  indictment; 
i.e.,  a  written  accusation  authorized  by  a  grand  jury.  The 
grand  jury  consists  of  eighteen  or  more  men  and  is  convened 
from  time  to  time  in  each  county  to  investigate  any  charges  of 
crime  that  may  be  brought  before  it.  Proceedings  before  a 
grand  jury  are,  of  course,  ex  parte,  i.e.,  only  one  side  is  heard. 
These  proceedings  are  under  the  supervision  of  the  legal 
representative  of  the  state,  the  prosecuting  attorney.  The 
object  of  the  grand  jury  investigation  is  to  ascertain  what 

35 


36  THE  LAW  OF  THE  LAND 

persons  should  be  tried  before  a  trial  jury  and  whether  the 
evidence  against  people  accused  of  crime  is  sufficient  to  justify 
the  state  in  prosecuting  them.  If  an  indictment  is  found 
and  the  person  has  not  been  arrested,  the  authorities  try  to 
arrest  him.  The  names  of  all  who  are  indicted  are  placed  on 
a  criminal  docket  to  await  trial  before  a  trial  jury.  The  grand 
jury  system  is  painfully  cumbrous. 

In  darker  ages  the  criminal  law  was  so  often  used  as  an 
instrument  of  oppression  and  for  the  punishment  of  political 
offenders  and  the  criminal  laws  were  so  cruel,  that  popular 
sympathy  was  with  the  man  accused  of  crime  and  gradually 
he  was  given  various  rights  and  privileges  to  even  up  his 
unequal  contention  with  the  powers  of  the  state.  It  is  not 
unlikely  that  this  process  has  gone  too  far. 

In  many  states  criminal  procedure  has  become  so  complex 
and  so  overridden  with  technicalities  that  any  criminal  who 
can  afford  to  pay  skilful  counsel  may  escape  all  penalty  except 
the  large  payments  he  makes  to  his  own  lawyers.  The  diffi- 
culty of  convicting  a  wealthy  criminal  is  the  scandal  of  our 
legal  administration  of  justice. 

On  the  other  hand,  the  criminal  law  as  it  exists  is  in- 
credibly unjust  to  the  poor  and  ignorant.  A  widow  with  a 
dependent  family  started  to  sell  fish  in  New  York  and  failed 
to  cover  them  over  to  protect  them  from  the  flies.  She  was 
arrested  and  fined  two  dollars.  She  did  not  have  so  much 
and  was  sent  to  jail  for  a  short  term,  leaving  her  family  of 
young  children  unattended.^ 

If  a  wealthy  young  man  is  arrested  for  speeding,  he  is 
released  on  his  own  recognizance  or  a  deposit  of  cash.  The 
next  day  he  is  fined  twenty-five  dollars,  promptly  writes  a 
check  and  walks  away.  Meanwhile  we  marvel  at  the  growth 
of  anarchistic  thought! 

^  Scribner's  Magazine,  July,   1919.     Page   115. 


CRIMINAL  LAW  37 

§  33.    Classes  of  Offenses  Against  the  Criminal  Law 

It  is  well  to  know  that  offenses  against  the  criminal  law 
are  divided  into  two  classes:  felonies  and  misdemeanors,  ac- 
cording to  the  degree  of  the  offense. 

A  felony  is  a  grave  offense,  punishable  by  heavy  penalties. 
A  misdemeanor  is  a  lighter  breach  of  the  law  and  is  punish- 
able by  lesser  penalties. 

Burglary — the  breaking  into  a  dwelling  house  after  dark 
with  criminal  intent — is  a  felony  and  is  punished  by  confine- 
ment in  a  penitentiary.  Driving  an  automobile  too  fast  is  a 
misdemeanor  and  may  be  punished  by  a  fine  or  confinement 
in  the  county  jail. 

Criminal  offenses  are  also  divided  on  another  basis  into 
two  classes:  those  which  are  wrong  in  themselves  and  those 
which  are  wrong  merely  because  the  law  prohibits  them.  In 
order  to  make  this  distinction  easier  to  keep  in  mind,  lawyers 
use  the  Latin  terms  "malum  in  se"  (wrong  in  itself)  and 
"malum  prohibitum"  (wrong  because  it  is  prohibited).  At  the 
present  time  there  are  a  great  many  naturally  indifferent 
actions  which  have  been  made  into  'rimes  by  the  procedure 
of  the  legislature,  and  there  is  such  a  multitude  of  these  laws 
that  it  is  very  hard  for  anyone  even  with  the  best  intentions 
to  avoid  violation  of  the  law  at  some  time. 

§  34.     Penalties 

The  penalties  for  violation  of  the  criminal  law  are  fines, 
imprisonment,  and,  for  a  few  offenses,  death.  In  this  country 
the  Constitution  of  the  United  States  prohibits  banishment 
and  forbids  cruel  and  unusual  punishments. 

In  no  direction  is  there  greater  room  for  reform  than  in 
our  treatment  of  criminals.  Many  of  these  are  as  they  are 
by  reason  of  environment  and  lack  of  training.  Others  are 
mental  defectives  who  should  be  humanely  kept  from  tempta- 
tions they  cannot  withstand.     It  may  safely  be  said  that  our 


38  THE  LAW  OF  THE  LAND 

criminal  law  as  it  is  generally  administered  does  not  prevent 
crime,  reform  the  criminal,  or  deter  others  from  crime. 

The  most  dangerous  and  vicious  criminals  are  those  who 
are  intelligent  and  educated  and  use  these  advantages  to  keep 
clear  of  the  clutches  of  the  law,  while  they  do  things  that  in 
effect  injure  their  fellows  far  more  than  all  the  burglars  and 
murderers  in  the  country.  These  are  the  "malefactors  of 
great  wealth"  that  roused  Roosevelt's  honest  wrath.  The 
criminal  law  always  lags  behind,  and  enactments  to  check  the 
crimes  of  such  as  these  unfortunately  catch  only  their  clumsy 
imitators. 


Review  Questions 

1.  Who  is  the  plaintiff  in  a  criminal  case?    Why? 

2.  What  is  the  function  of  a  grand  jury? 

3.  Can  you  suggest  any  me-thod  of  improving  the  administration 

of  our  criminal  law? 

4.  If  a  certain  action,  harmless  of  itself,  has  been  made  a  crime, 

does  it  thereby  become  morally  wrong? 

5.  If  a  man  is  willing  to  pay  the  penalty,  say  for  speeding,  does 

that  justify  him  in  disregarding  the  law? 

6.  What  are  the  two  classes  of  offenses  against  the  criminal  law? 

Give  an  example  of  each. 

7.  Outline  the  usual  criminal  procedure. 

8.  What  is  the  primary  object  of  legal  penalties  for  crime:    (i) 

retaliation,  (2)  protection  of  the  community,  or  (3)  the  re- 
formation of  the  criminal  ?  What  should  be  the  object,  or 
objects  of  the  criminal  law? 

9.  Which  are  the  greater  deterrents  of  crime — severe  penalties,  or 

more  moderate  punishments?    Why? 


PART  II 
CONTRACTS 


CHAPTER  VI 

ESSENTIAL  FEATURES  OF  A  CONTRACT^ 

§  35.     Introductory 

Civilized  life  may  be  said  to  be  founded  on  agreements. 
Whenever  an  individual  buys  or  sells  something,  he  makes 
an  agreement.  Our  whole  social  and  business  life  is  based 
upon  a  series  of  understandings  with  those  with  whom  we 
come  in  contact.  The  more  complex  our  civilization  becomes, 
the  more  agreements  are  made  and  the  more  extended  be- 
come our  contractual  relations. 

Whenever  an  agreement  is  of  such  a  nature  that  it  may 
be  enforced  in  a  court  of  law,  it  is  called  a  contract.  Most 
of  the  laws  on  our  statute  books  and  most  of  the  laws  affect- 
ing the  daily  life  of  the  individual  have  to  do  with  the  sub- 
ject of  contracts.  The  sale  of  goods  is  a  contract,  the 
appointment  of  an  agent  is  a  contract,  and  the  business  done 
by  an  agent  is  that  of  making  contracts.  Insurance,  whether 
of  life  or  of  property,  is  a  contract ;  partnerships  and  corpora- 
tions are  both  based  on  contracts ;  in  fact,  there  is  no  business 
relation  but  is  either  itself  a  contract  or  else  is  based  upon 
a  contract. 

§  36.    Definition 

A  contract  is  defined  as  an  agreement  between  two  or 
more  parties,  for  a  sufficient  consideration,  to  do  or  not  to  do 
some  specified  thing  or  things.  This  is  the  accepted  legal 
definition  of  a  contract. 


» For  forms  of  contracts,  see  Chapters  XCVIII-CI,  Forms  1-25. 

41 


42  CONTRACTS 

It  is  an  agreement,  and  the  minds  of  the  parties,  to  use 
the  technical  phrase,  "must  meet." 

There  must  be  two  legally  competent  parties  to  a  contract ; 
there  may  be  many. 

There  must  be  a  consideration,  without  which  there  can 
be  no  legal  obligation.  If  a  man  agrees  to  do  something, 
there  must  be  a  valid  reason  or  inducement  for  him  to  bind 
himself.  This,  in  legal  parlance,  is  the  consideration.  If 
the  promise  were  gratuitous,  that  is,  if  there  were  no  induce- 
ment for  the  promise,  it  might  be  a  matter  of  honor  to  carry 
it  out,  but  it  would  not  be  a  matter  of  legal  compulsion.  A 
naked  promise,  without  consideration,  cannot  be  enforced  in 
a  court  of  law. 

There  must  be  the  obligation,  or  thing  to  be  done.  This 
promise  may  be  to  pay  money,  to  do  work,  or  to  deliver 
goods;  or  it  may  be  merely  not  to  do  something  which  the 
person  contracting  had  a  right  to  do. 

§37.     Essential  Features 

In  order  to  make  any  agreement  legally  enforceable  as  a 
contract,  there  must  be  the  following  essentials: 

1.  The  parties  to  the  agreement  must  be  legally  com- 

petent to  contract. 

2.  The  agreement  must  be  to  do  something  lawful. 

3.  The  parties  must  agree  to  the  same  thing. 

4.  There  must  be  a  sufficient  consideration. 

These  several  elements  of  a  contract  will  be  explained  in 
the  following  sections. 

§  38.     Competency  of  Parties 

The  parties  to  a  contract  may  be  individuals,  partnerships, 
pr  corporations.    The  partnership  name  may  be  different  frorn 


ESSENTIAL  FEATURES  OF  A  CONTRACT  43 

the  names  of  the  partners  composing  it.  The  laws  of  most 
states  provide  that  one  or  more  persons  may  associate  them- 
selves under  any  name  they  choose  to  assume  for  business 
purposes,  and  upon  recording  it  in  the  proper  offices  together 
with  their  own  names  and  addresses  may  do  business  and 
contract  under  the  assumed  name. 

A  person  would  bind  himself  if  he  contracted  under  an 
assumed  name.  The  other  party  might  not  be  bound,  if  he 
was  deceived. 

Generally  all  persons  are  able  to  bind  themselves  by  con- 
tract. It  is  a  positive  right.  But  there  are  exceptions  to 
the  general  rule.  Certain  persons  are  not  competent  to  con- 
tract, and  certain  other  persons  have  only  a  qualified  right 
to  make  contracts. 

If  a  person  has  been  legally  declared  a  lunatic  or  a  spend- 
thrift, and  a  guardian  has  been  appointed  by  the  court  to 
look  after  his  property,  such  person  has  no  power  to  enter 
into  a  binding  contract.  No  agreement  made  by  him  could 
be  enforced,  even  though  the  person  dealing  with  him  did 
not  know  that  he  was  insane  or  a  spendthrift  and  had  been 
legally  declared  incompetent.  There  is  one  exception  to  this 
rule — a  contract  to  buy  absolute  necessities  for  life  and  health. 
A  person  may  supply  an  insane  person  with  necessary  things 
and  will  be  legally  entitled  to  payment  for  them. 

As  it  is  necessary  for  a  party  to  give  his  free  consent  to 
an  agreement  and  to  know  what  he  is  consenting  to,  intoxi- 
cated and  insane  persons  who  have  not  been  legally  declared 
to  be  such,  cannot  make  enforceable  contracts  if  the  insanity 
or  the  intoxication  prevents  them  from  understanding  the 
nature  of  their  acts  at  the  time  the  contract  is  entered  into. 

The  Law  Varies  with  Location.  This  question  of  com- 
petency depends  on  the  law  of  the  place  where  the  contract 
was  made.  If  a  person  legally  declared  a  spendthrift  should 
go  into  another  state,  he  would  be  perfectly  capable  of  making 


44  CONTRACTS 

contracts  there  until  he  has  been  declared  a  spendthrift  In 
the  courts  of  that  state.  A  person  legally  declared  insane, 
if  he  had  lucid  intervals,  might  in  a  state  other  than  that  in 
which  he  had  been  declared  insane  make  an  enforceable  con- 
tract in  a  lucid  interval.  The  age  at  which  a  person  becomes 
legally  competent  to  contract  varies  in  different  states.  The 
local  law  should  always  be  consulted. 

Indians.  Indians  living  on  government  reservations  are 
protected  by  the  federal  law,  and  may  make  enforceable  con- 
tracts only  under  such  conditions  as  that  law  prescribes.  If 
they  leave  the  reservations  and  enter  into  ordinary  business 
relations,  they  are  usually  held  liable  In  the  same  way  as  any 
other  business  men. 

Married  Women.  A  married  woman  does  not  have  entire 
freedom  of  contract.  As  a  usual  rule  a  married  woman  can- 
not make  an  enforceable  contract  with  her  husband.  Formerly 
a  married  woman  could  not  make  a  contract  at  all  without 
her  husband's  consent,  but  this  has  been  changed.  It  is  safest 
to  consult  the  law  of  the  state  in  which  one  resides  before 
entering  into  a  contract  with  a  married  woman,  as  a  few 
states  still  give  her  a  measure  of  irresponsibility.  A  married 
woman  may,  in  any  state,  act  as  an  agent  for  her  husband. 
(See  §  128.) 

Minors.  Minors  (persons  who  are  under  legal  age,  which 
is  generally  21)  have  only  a  qualified  ability  to  make  con- 
tracts. That  is  to  say,  the  minor  may  make  a  contract  but 
the  other  contracting  party  cannot  enforce  It  if  the  minor 
chooses  not  to  perform  his  part.  The  minor  may  even  annul 
the  contract  after  it  has  been  performed,  return  the  property 
and  demand  his  money  back,  or  vice  versa.  If  the  minor 
has  taken  a  fraudulent  advantage  of  the  other  person  by  lead- 
ing that  person  to  think  he  Is  of  full  age,  the  law  will  later 
prevent  the  minor  from  stating  that  he  is  under  age  when 
he  comes  into  court,  and  will  therefore  make  him  perform 


ESSENTIAL  FEATURES  OF  A  CONTRACT  45 

his  agreement.  If  under  the  contract  the  minor  has  received 
property  or  money  from  the  other  party,  he  will  be  made  to 
repay  or  to  return  it  if  possible ;  but  if  he  has  spent  or  other- 
wise disposed  of  it  he  may,  as  a  rule,  still  refuse  to  repay  or 
return  it. 

People  dealing  with  young  persons  are  supposed  to  look 
out  for  their  own  interests  and  to  find  out  whether  such 
parties  are  of  age  or  not.  The  minor,  because  of  his  in- 
experience, is  guarded  by  the  law  not  only  against  the  designs 
of  other  persons  but  also  against  his  own  carelessness.  He 
is  not,  however,  guarded  against  his  own  wrong-doing.  If 
he  injures  property  he  will  be  obliged  to  pay  damages. 

After  a  minor  has  come  of  age  he  may  confirm  any  con- 
tracts made  while  he  was  a  minor.  He  may  do  this  either 
by  words  or  by  acts.  If  he  keeps  the  property  obtained 
under  such  a  contract  for  an  unreasonable  length  of  time, 
however,  the  court  will  consider  that  he  has  confirmed  it. 
Moreover,  unless  the  minor  pleads  his  infancy  in  court,  a 
contract  may  be  enforced  against  him  as  against  any  other 
person.  No  one  else  may  plead  this  for  him.  If  he  becomes 
insolvent,  a  receiver  of  his  property  may  not  call  off  any  of  his 
contracts  for  him,  no  matter  how  unfair.  If  the  minor  himself 
chooses  to  stand  by  them,  they  are  legally  binding. 

Note: 

I.     It  is  not  safe  to  have  any  business  dealings  with  a 
minor. 

§39.    The  Subject  Matter  Must  Be  Lawful 

The  subject  matter  of  a  contract  is  that  which  the  agree- 
ment is  about.  It  may  consist  of  any  property,  commodity, 
or  service  which  could  be  the  subject  of  a  business  transaction, 
or  it  may  be  to  do  or  not  to  do  something,  such  as  to  pay 
for  the  privilege  of  naming  a  child,  or  to  pay  a  young  man 
to  abstain  from  using  tobacco. 


46  CONTRACTS 

An  agreement  to  do  anything  contrary  to  law  would  be 
unenforceable.  An  agreement  to  do  anything  which,  while 
not  directly  contrary  to  any  special  statute,  would  be  in- 
jurious to  the  peace  and  good  order,  the  health,  or  the  morals 
of  the  community,  would  be  against  public  policy  and  would 
be  unenforceable. 

The  following  agreements  would  be  contrary  to  law  or  to 
public  policy  and  therefore  unlawful: 

1.  An  agreement  to  prevent  a  person  from  marrying  or 
to  break  up  a  marriage. 

2.  An  agreement  to  persuade  one  person  to  marry  an- 
other. 

3.  An  agreement  in  restraint  of  trade.  The  Supreme 
Court  has  decided  that  agreements  in  reasonable  restraint  of 
trade  are  not  contrary  to  public  policy.  Where  a  person  sells 
out  his  business  to  another  he  may  agree  not  to  engage  in 
that  business  again  within  certain  reasonable  territorial  limits 
and  for  a  limited  time,  but  the  majority  of  the  cases  in  this 
country  condemn  contracts  to  restrain  trade  throughout  the 
entire  state  or  in  the  entire  country  for  an  indefinite  period. 
It  is  considered  to  be  against  public  policy  that  the  people  of 
the  whole  state  should  for  any  length  of  time  he  deprived 
of  the  industry  and  skill  of  anyone  engaged  in  a  useful  em- 
ployment. 

4.  Gambling  contracts.  Contracts  for  the  buying  and 
selling  of  "options"  and  "futures"  and  of  stock  "on  margin," 
are  regarded  as  gambling  contracts  in  some  states,  and  will 
not  be  enforced  unless  the  party  selling  the  stock  was  in  some 
way  entitled  to  it  or  was  selling  it  as  agent  for  the  real  owner. 

Fire  insurance  can  be  taken  out  on  property  only  by  a 
party  who  has  some  interest  in  it,  and  life  insurance  only  by 
the  party  insured,  his  wife,  child,  or  some  other  person  who 
would  be  entitled  to  support,  or  by  a  creditor  who  had  a 
claim  against  the  person  whose  life  was  insured,  or  by  a 


ESSENTIAL  FEATURES  OF  A  CONTRACT  47 

business  partner  or  employer.  Otherwise  it  would  merely 
amount  to  a  wager  as  to  whether  the  property  would  be  de- 
stroyed or  when  the  person  would  die. 

5.  Contracts  in  which  usurious  interest  is  charged.  Some- 
times the  contract  itself  will  be  enforced,  but  the  party  will 
be  prevented  from  collecting  interest;  sometimes  he  will  not 
be  allowed  to  enforce  any  part  of  the  contract. 

6.  Contracts  to  commit  a  fraud  or  a  crime. 

7.  Contracts  for  the  sale  of  adulterated  goods. 

8.  Contracts  to  bribe  public  officials,  or  contracts  of 
bribery  with  such  officials. 

9.  Agreements  by  candidates  to  appoint  persons  to  posi- 
tions in  case  said  candidates  are  elected,  or  to  do  anything 
else  in  return  for  aid  in  securing  their  election. 

10.  Agreements  not  to  prosecute  a  person  for  a  crime. 

All  of  these  last  cases  are  contrary  to  public  policy  be- 
cause the  subject  matter  pertains  to  something  unlawful  and 
injurious  to  the  community. 

11.  An  agreement  made  in  advance  not  to  take  a  dispute 
into  court.  The  law  favors  the  settling  of  disputes  out  of 
court  as  much  as  possible;  but  it  is  contrary  to  public  policy 
to  deprive  any  man  in  advance  of  his  right  to  be  heard  in 
court  whether  by  agreement  or  otherwise.  But,  while  two 
parties  may  not  contract  to  refrain  from  taking  a  possible 
disagreement  to  court,  they  may  contract  to  arbitrate  in  a 
specified  manner  before  the  court  is  resorted  to. 

12.  A  contract  to  perform  services  in  return  for  money 
made  by  a  medical  student  before  he  has  been  licensed,  by  a 
law  student  before  he  has  been  admitted  to  the  bar,  or  by  any 
other  person  who  is  required  by  the  law  to  submit  to  certain 
requirements  before  being  licensed  to  practice  his  profession 
or  vocation  and  who  is  not  yet  so  licensed,  is  void ;  any  fees 
which  may  have  been  agreed  upon  cannot  be  collected. 

When  an  illegal  contract  has  been  made,  the  courts  will 


48  CONTRACTS 

refuse  to  interfere  at  all.    The  parties  are  simply  left  as  they 
are,  to  straighten  the  matter  out  as  best  they  can. 

Notes: 

1.  A  contract  to  do  anything  unlawful  cannot  be  en- 

forced. 

2.  No  money  paid  on  such  a  contract  can  be  recovered. 

3.  No  services  so  rendered  can  be  made  the  basis  of  a 

suit. 

§  40.     The  Law  of  Place 

The  law  which  governs  a  contract  is  the  law  of  the  place 
where  it  was  made.  If  it  is  to  be  performed  elsewhere,  the 
parties  may,  if  they  wish,  expressly  state  that  it  is  made  in 
conformity  with  the  law  of  the  state  where  it  is  to  be  per- 
formed, provided  they  do  not  do  so  in  an  attempt  to  evade 
the  law  of  the  state  where  it  was  made.  A  contract  made  in 
good  faith  to  be  performed  elsewhere  need  not  comply  with 
the  law  of  the  state  where  it  was  made  if  there  is  a  conflict 
between  the  two  laws,  but  the  fact  that  it  is  to  be  governed 
by  the  law  of  a  state  other  than  that  in  which  it  was  made 
must  always  be  expressly  stated  in  the  contract.  (See  also 
§38.) 

§  41.    The  Subject  Matter  Must  Exist 

There  must  be  some  subject  matter  in  existence  to  contract 
about.  If  the  contract  were  to  add  a  wing  to  a  house  and 
the  house  were  burned  down  at  the  time  of  the  agreement 
without  the  knowledge  of  the  contracting  parties,  there  would 
be  no  contract.  If,  however,  the  contract  was  about  some- 
thing that  has  been  lost  or  destroyed  but  that  might  be  re- 
placed, such  as  a  contract  for  the  sale  of  grain,  the  contract 
is  valid  and  the  party  who  agreed  to  deliver  the  grain  must 
procure  it  elsewhere.    (See  also  §  88.) 


ESSENTIAL  FEATURES  OF  A  CONTRACT  49 

§  42.    Agreement  of  the  Parties 

It  is  essential  that  the  parties  to  a  contract  agree  on  the 
terms;  or,  in  legal  phraseology,  that  "their  minds  meet."  This 
agreement  results  usually  from  an  offer  made  by  one  party 
which  is  accepted  by  the  other.  The  offer  or  proposal  may 
be  oral  or  written,  and  the  acceptance  may  be  oral  or  written. 
The  simplest  form  of  contract  is  an  offer  to  sell  goods  at  a 
specified  price  and  an  acceptance  of  the  goods  at  that  price. 
If  this  offer  is  made  by  letter  and  the  acceptance  is  made  by 
letter,  the  two  letters  taken  together  constitute  a  complete 
contract  of  sale.  Some  other  points  might  be  mentioned,  but 
these  the  law  will  supply.  When  nothing  is  said  as  to  terms, 
the  law  implies  cash.  When  nothing  is  said  about  delivery, 
the  law  implies  that  the  buyer  will  be  entitled  to  delivery 
when  he  pays  the  price.     (See  Chapter  XVI.) 

Acceptance  by  Mail  or  Telegraph.  If  the  party  making 
the  offer  requests  an  answer  by  mail  or  telegraph,  the  post- 
office  or  the  telegraph  company  becomes  his  agent  to  receive 
the  acceptance,  and  the  agreement  becomes  effective  the  mo- 
ment a  properly  stamped  and  addressed  letter  of  acceptance 
is  deposited  in  the  mail-box  (even  though  the  letter  does  not 
reach  its  destination)  or  the  moment  a  prepaid  telegram  (un- 
less the  other  party  had  directed  that  it  be  sent  "collect") 
with  the  proper  address.  Is  given  to  the  telegraph  company  to 
be  sent. 

The  point  is  Important  because  the  person  making  the 
offer  has  a  right  to  withdraw  it  if  he  informs  the  other  party 
of  his  change  of  decision  before  the  other  party  has  accepted, 
i.e.,  has  put  a  letter  In  the  mail  or  has  sent  a  telegram  of 
acceptance.  In  other  words,  a  contract  may  be  complete  before 
the  acceptance  is  actually  received,  and  it  is  then  too  late  to 
withdraw  the  offer. 

If  a  party  makes  an  offer  by  mail  or  telegraph,  he  is 
regarded  as  having  requested  a  reply  by  the  same  means 


50  CONTRACTS 

unless  he  expressly  asks  for  a  reply  in  some  other  way;  so 
that  if  the  party  receiving  the  offer  replies  in  the  same  way, 
his  acceptance  becomes  effective  from  the  moment  he  mails 
it  or  gives  it  to  the  telegraph  company  to  send.  If,  on  the 
contrary,  he  replies  in  some  other  way,  there  is  no  agreement 
until  the  anszver  actually  reaches  the  other  party.  In  this 
last  case,  if  the  first  party  sends  a  letter  withdrawing  the  of¥er 
and  this  letter  arrives  at  its  destination  before  the  letter  of 
acceptance  reaches  the  first  party,  there  is  no  agreement. 

Manner  of  Acceptance.  The  offer  must  be  accepted  in 
accordance  with  its  terms.  To  accept  an  offer  in  any  terms 
other  than  those  in  which  it  was  made  amounts  to  a  refusal. 
The  first  party  may  decide  to  accept  the  new  terms,  in  which 
case  there  will  be  a  new  and  different  agreement,  but  he  has 
the  privilege  of  rejecting  the  proposed  contract  entirely.  If 
the  offer  was  made  to  one  person  only,  another  could  not 
accept  it;  if  made  for  a  limited  time,  it  must  be  accepted 
within  that  time.  Advertisements  offering  a  reward  for  the 
return  of  lost  articles  are  made  to  the  public  in  general  and 
the  offer  may  be  accepted  by  anyone  who  finds  the  goods. 
An  offer  cannot  be  accepted,  however,  after  the  party  who 
made  it  dies  or  becomes  insane,  and  it  must  in  any  case  be 
accepted  within  a  reasonable  time;  people  cannot  be  held  to 
offers  made  long  ago  and  forgotten,  or  after  the  circumstances 
which  led  to  the  offers  have  changed.  What  constitutes  a 
reasonable  time  will  depend  on  the  circumstances.  The  party 
who  makes  the  offer  may  set  a  time  limit  for  its  acceptance, 
after  the  expiration  of  which  the  offer  is  no  longer  open  for 
acceptance.  It  is  always  prudent  to  accept  a  desirable  offer 
promptly. 

Options.  In  negotiations  an  option  or  refusal  may  be 
given,  good  for  a  certain  time.  Unless  something  has  been 
paid  for  an  option,  it  may  be  revoked  at  any  time  because 
it  is  an  agreement  without  consideration.    An  option  so  given 


ESSENTIAL  FEATURES  OF  A  CONTRACT  51 

is  a  contingent  offer  and  may  be  accepted  at  any  time  before 
withdrawal  or  expiration  of  time. 

§  43.     Oral  Agreement 

In  many  cases  of  contract  the  parties  agree  upon  the 
terms  orally  by  discussion,  proposal  and  counter-proposal, 
suggestion  and  objection,  until  they  think  that  they  have 
arrived  at  substantial  agreement.  At  this  stage  the  contract 
should  be  reduced  to  writing.  When  this  is  attempted  it  will 
usually  develop  that  each  party  has  understood  the  discussion 
differently  and  a  renewed  discussion  results.  Finally,  when 
the  written  agreement  is  agreed  to  by  both,  it  is  signed;  and 
then  it  supersedes  all  understandings  and  binds  the  parties. 

In  most  cases  an  oral  contract  is  as  good  as  a  written  one 
except  that  it  is  harder  to  prove.  After  a  discussion  of  terms 
each  party  has  a  different  impression  of  the  conclusions 
reached.  Certain  parts  deemed  favorable  by  one  party  are 
most  strongly  impressed  upon  his  memory,  while  other  parts 
not  so  agreeable  are  not  so  well  remembered,  and  after  a  year 
or  so  two  men  can  honestly  go  into  court  and  swear  to 
absolutely  contradictory  accounts  of  the  same  transaction. 
Here  the  great  advantage  of  the  written  agreement  becomes 
apparent.  That  which  is  written  changes  not;  and  the  law 
will  not  allow  oral  evidence  to  be  introduced  to  contradict 
that  which  the  parties  have  agreed  to  in  writing.  If,  mean- 
while, one  of  the  parties  has  died,  the  written  contract  is  yet 
more  essential  for  proof.  Hence,  in  business,  one  should 
never  entrust  to  memory  anything  that  can  possibly  be  put 
into  writing.     (See  §§  46,  47.) 

Notes: 

1.  In  most  disputes  over  contracts,  the  trouble  arises 

because  part  or  all  of  the  contract  is  not  written. 

2.  On  this  account  the  exchange  of  letters  makes  for 

certainty  in  contracts. 


52 


CONTRACTS 


§  44.     Consideration 

A  promise  to  do  something  or  to  give  something  is  not 
a  contract,  since  a  mere  promise  cannot  be  enforced  by  law. 
There  must  be  a  consideration  for  the  promise ;  the  considera- 
tion being  something  done,  given,  or  promised  by  the  other 
party. 

One  party's  promise  is  a  good  consideration  for  the 
promise  of  another  party.  If  A  agrees  to  pay  B  for  a  certain 
service  and  B  agrees  to  perform  such  service,  a  vaHd  con- 
tract has  been  created  and  A  must  fulfil  his  promise  when 
B  has  fulfilled  his.  Or  if  A  promises  to  pay  B  for  goods 
delivered  to  C,  when  B  has  made  delivery  A  must  pay  him. 

Mutual  Promises  as  Consideration.  If  a  person  makes  a 
promise  in  return  for  another  person's  promise,  the  law  will 
require  him  to  make  good  his  promise  when  the  first  party 
has  fulfilled  his.  In  other  words,  mutual  promises  are  con- 
sideration for  each  other.  An  example  may  be  found  in  an 
ordinary  real  estate  contract  wherein  one  party  promises  to 
sell  and  the  other  party  promises  to  buy.  The  consideration 
for  an  enforceable  contract  may  be  very  small  compared  with 
the  value  of  what  is  agreed  to  by  the  other  party;  it  may  be 
inadequate  or  even  insignificant. 

For  instance,  a  man  might  offer  to  give  his  son  $1,000  if 
he  would  refrain  from  smoking  until  he  was  twenty-one.  It 
would  seem  that  the  son  gives  very  little  in  return  for  the 
money,  but  he  is  giving  up  the  right  to  smoke — and  the  con- 
tract will  be  enforced.  In  this  case,  the  consideration  for  the 
$1,000  is  the  surrender  of  a  privilege. 

It  is  very  common  to  mention  the  sum  of  $1  in  contracts 
where  the  parties  do  not  wish  the  real  amount  of  the  con- 
sideration to  be  known.  In  most  cases  one  dollar  named  will 
be  held  a  sufficient  consideration.  "A  valuable  consideration, 
however  small  or  nominal,  if  given  or  stipulated  for  in  good 
faith,  in  the  absence  of  fraud,  is  sufficient  to  support  an  action. 


ESSENTIAL  FEATURES  OF  A  CONTRACT  53 

A  stipulation  in  consideration  of  one  dollar  is  quite  as  effectual 
and  valuable  a  consideration,  as  the  larger  sum  stipulated  and 
paid."  ^ 

Impossible  Consideration.  If  the  consideration  agreed  to 
by  one  of  the  parties  is  something  impossible  to  perform,  the 
contract  is  void  and  unenforceable.  This  would  be  true  if  one 
of  the  parties  agreed  to  do  an  illegal  act  in  return  for  the 
other  party's  promise.  He  could  not  be  required  to  perform 
it;  consequently  he  has  given  nothing. 

Doing  something  that  one  is  already  obliged  by  law  to  do 
is  not  a  valid  consideration;  for  instance,  a  promise  to  pay 
a  debt  already  owed  would  not  be  a  good  consideration  for 
a  new  agreement.  An  agreement  to  pay  half  of  a  debt  due 
in  full  settlement  would  not  be  any  consideration  for  the  other 
half  which  the  law  would  still  hold  to  be  a  binding  debt. 
(See  §500.) 

Love  and  affection  for  one's  friends  and  relatives  do  not 
constitute  a  legal  consideration  for  a  contract.  One  does 
not  love  them  more  or  less  on  account  of  the  agreement. 
There  is  no  change  in  the  situation  of  the  person  which  would 
make  it  necessary  for  the  law  to  interfere  to  compel  the  other 
party  to  keep  his  promise. 

Notes: 

1.  Some  consideration  should  always  be  mentioned  in 

the  contract. 

2.  It  is  wiser  to  name  the  true  consideration,  as  then 

there  can  be  no  misunderstanding  if  it  becomes 
necessary  to  prove  the  contract  in  court. 

3.  The  matter  of  no  consideration  comes  up  again  and 

again  in  legal  practice,  making  void  otherwise 
good  agreements,  and  the  principle  should  be 
thoroughly  comprehended. 


2  Lawrence  v.  McCalmont,  2  Howard  (U.  S.)  426. 


54 


CONTRACTS 


Review  Questions 


1.  What  are  some  common  synonyms  for  the  word  "contract"? 

When  does  the  word  "contract"  apply?  Why  is  the  law  of 
contracts  of  wide  application? 

2.  What  is  the  legal  definition  of  a  contract? 

3.  Name  and  number  the  essential  elements  of  a  contract.     What 

does  the  word  "consideration"  mean  as  an  element  in  a  con- 
tract t    Give  an  example  of  a  negative  obligation  in  a  contract. 

4.  Who  are  competent  to  make  contracts  ?    Who  are  not  competent 

to  make  contracts?  If  a  person  not  competent  to  make  a 
contract  signed  an  agreement,  what  would  be  the  effect? 
May  a  person  contract  under  any  name  he  may  assume? 

5.  What  is  the  law  as  to  a  married  woman's  contract  in  the  state 

in  which  you  live  ?  ^ 

6.  What  is  the  effect  when  a  minor  makes  a  contract? 

7.  What  is  the  legal  age  of  majority  in  your  state? 

8.  If  a  minor  represents  himself  as  of  age,  what  is  the  effect? 

9.  If  a  minor  bought  a  motorcycle,  could  he  keep  it  and  refuse  to 

pay  for  it?     Suppose  he  had  wrecked  it? 

10.  When  may  a  creditor  enforce  a  contract  against  a  minor? 

11.  Can  a  minor  enter  into  a  binding  contract  of  marriage?    Why 

this  exception? 

12.  What  is  the  object  of  a  minor's  disabilities?    Why  is  it  unsafe 

to  deal  with  a  minor? 

13.  What  two  classes  of  contracts  are  unenforceable?    What  agree- 

ments about  marriage  are  unenforceable? 

14.  What  is  the  rule  as  to  "agreements  in  restraint  of  trade"? 

15.  What  are  "wagering  contracts"? 

16.  What  is  the  law  as  to  usury  in  your  state? 

17.  What  other  agreements  are  illegal? 

18.  What  does  lex  loci  mean?     Is  a  contract  affected  by  the  law 

of  the  place  where  it  is  made?  A  contract  executed  and 
delivered  in  California  is  the  subject  of  a  suit  in  New  York. 


•Where  questions  as  to  local  sUtutes  are  given,  a  note  should  be  made  and  the 
matter  should  be  looked  up  later.  The  statutes  of  the  state  may  be  consulted  in 
some  public  library  and  the  answer  written  after  the  question;  a  legal  friend  may  be 
questioned;  a  letter  may  be  written  to  an  editor  who  has  a  query  department. 
„  ♦  *  '■^Ki*''*.  '""ity-^'ght  different  states  and  in  a  book  of  general  information  it  is 
^^LlTVf  ^3  give  the  varying  statutes  of  each  state,  but  it  is  of  advantage  to  the 
Lh,r.  ;iJ2°LT  *  ?  particular  information  as  to  his  own  state  and  write  this  out 
where  it  can  be  found  when  wanted. 


ESSENTIAL  FEATURES  OF  A  CONTRACT  55 

What  laws  govern  the  validity  and  construction  of  the  con- 
tract?   What  laws  govern  the  remedy? 

19.  What  is  the  rule  as  to  existence  of  the  subject  matter?     If  a 

sale  were  made  of  a  particular  horse  at  another  place  and 
the  horse  had  died  before  the  contract  was  made,  what  would 
be  the  effect?     Suppose  the  purchaser  had  paid  for  it? 

20.  What  terms  as  to  payment  are  implied  in  a  contract?     As  to 

delivery  ? 

21.  When  do  the  minds  of  the  parties  meet  in  a  contract  made  by 

mail  or  telegraph?  What  is  the  rule  as  to  the  method  of 
acceptance  ? 

22.  A  writes  and  offers  goods  to  B,  in  another  town,  at  a  stated 

price.  B  receives  the  offer  and  immediately  writes  back  to 
A  his  acceptance.  The  letter  is  deposited  in  the  mail-box 
but  never  reaches  A.  A,  not  hearing  from  B,  offers  his  goods 
to  C,  whose  acceptance  reaches  A.  B  sues  A  for  breach  of 
contract.     Has  he  a  cause  of  action?    Why? 

23.  A,  on  March  21,  wrote  B,  a  day's  journey  away,  and  offered 

B  a  position.  He  ended  his  letter  by  saying:  "You  will  confer 
a  favor  by  giving  me  your  answer  by  return  mail."  B  received 
the  letter  on  March  22.  B  on  the  23d  wrote  her  acceptance 
and  gave  it  to  a  boy  to  mail.  The  postmark  showed  that  it 
was  not  mailed  until  the  25th.  A  not  receiving  answer  offered 
position  to  another.  B  sued  for  breach  of  contract.  Has  she 
a  cause  of  action? 

24.  What  is  the  effect  of  accepting  with  a  slight  variation  of  terms? 

How  long  does  an  offer  stand  open? 

25.  Why  is  a  written  contract  better  than  an  oral  contract?     Why 

should  the  terms  of  an  agreement  be  definite? 

26.  Why  cannot  an  agreement  without  consideration  be  enforced  ? 
zy.     If  a  man  owes  $100  and  agrees  to  pay  $50  in  discharge  of  the 

debt,  can  he  be  made  to  pay  the  remainder?    Why? 
28.     Without  other  consideration  is  payment  of  a  smaller  sum  ever 
satisfaction  for  a  debt  of  greater  amount? 


CHAPTER  VII 

HOW  CONTRACTS  ARE  MADE 

§  45.     Classification  of  Contracts 

In  this  book  contracts  have  been  classified  according  to 
function,  into  contracts  of  sale,  contracts  of  agency,  etc.  Cer- 
tain other  more  arbitrary  classifications  of  contracts,  though 
only  occasionally  referred  to  in  practice,  are  frequently  the 
subject  of  examination  questions.  For  this  reason  these  clas- 
sifications are  explained  in  the  present  chapter. 

Some  of  the  terms  are  logically  objectionable,  but  those 
who  submit  themselves  to  examination  fare  better  if  they  give 
the  required  conventional  answers  than  if  they  follow  the 
rules  of  logic.  For  example,  a  common  question  is:  What 
are  contracts  of  record?  Part  of  the  required  answer  is: 
Judgments  and  recognizances.  As  a  matter  of  fact  neither 
a  judgment  nor  a  recognizance  is  a  contract  according  to  the 
legal  definition.  The  parties'  minds  do  not  meet,  and  there 
is  no  agreement.  Nevertheless  the  text-books  call  these  court 
entries  "contracts  of  record." 

Another  common  question  is:  What  is  a  simple  contract? 
and  the  answer  expected  is:  A  contract  not  of  record  or  under 
seal.  In  fact,  the  word  simple  means  the  opposite  of  com- 
pound, complex  or  intricate  and  in  many  cases  the  so-called 
simple  contracts  are  more  complex  and  abstruse  than  a  con- 
tract under  seal  such  as,  for  example,  a  quitclaim  deed,  than 
which  no  contract  could  be  simpler.  The  seal,  the  witnesses, 
the  notarial  acknowledgment,  the  filing  or  recording  of  a  con- 
tract in  an  office  of  registry  are  all  matters  intended  to  evidence 
the  contract.     They  do  not  make  it  complex  or  affect  its 

56 


HOW  CONTRACTS  ARE  MADE  57 

character  in  any  way.  Nevertheless,  those  who  are  preparing 
for  examination  must  know  how  to  answer  questions  of  this 
sort  upon  occasion. 

Contracts,  then,  may  be  classified  in  regard  to  dignity  and 
facility  of  proof  as  follows:  (i)  oral  contracts,  (2)  written 
contracts  not  under  seal  or  of  record,  (3)  contracts  under 
seal,  and  (4)  contracts  of  record. 

All  contracts  not  under  seal  or  of  record  are  called  simple 
or  parol  contracts  whether  in  writing  or  not. 

Formal  contracts  are  contracts  of  record,  bonds  and 
recognizances,  and  contracts  under  seal,  which  include  all  deeds 
and  instruments  affecting  land  that  are  required  to  be  recorded 
in  offices  of  public  registry. 

§  46.    Oral  Contracts 

A  contract  may  be  made  simply  by  word  of  mouth  or  by 
words  and  acts.  Such  a  contract  is  called  an  oral  contract. 
If  it  becomes  necessary  to  go  into  court  in  order  to  enforce  it, 
it  will  be  necessary  to  prove  it  by  oral  testimony.  The  parties 
to  it  will  be  called  on  to  testify  as  to  what  was  said  and  done, 
and  if  any  other  people  were  present  either  party  may  call 
them  as  witnesses. 

In  such  a  case  the  difficulty  is  that  the  agreement  has  not 
been  reduced  to  writing  and  the  various  parties  present  prob- 
ably have  entirely  different  ideas  as  to  the  meaning  of  what 
they  heard.  The  court  may  decide  that  the  testimony  as  to 
what  happened  is  so  vague  and  contradictory  that  it  cannot 
be  enforced  as  a  contract.  The  prudent  business  man  will 
insist  that  all  agreements  be  made  in  writing  and  properly 
signed,  in  order  that  there  may  be  no  question  as  to  just 
what  obligations  he  has  assumed  or  what  he  may  properly 
expect  from  the  other  party  to  the  contract.  Some  contracts 
must  be  in  writing  or  the  courts  will  refuse  to  enforce  them. 
(See  §  48.) 


gg  CONTRACTS 

Notes: 

1.  Avoid  oral  contracts. 

2.  Have  all  contracts  written  and  signed  by  the  parties 

thereto. 


§  47.    Written  Contracts 

The  written  contract  need  not  be  a  formal  document.  Two 
letters,  one  making  a  proposition  and  the  other  accepting  it, 
constitute  a  contract  just  as  much  as  a  legal  document  duly 
signed  and  sealed  and  acknowledged  before  a  notary. 

The  written  contract  should  contain  all  the  terms — the 
names  of  the  parties;  a  statement  of  the  consideration,  with 
the  time  and  the  method  in  which  it  is  to  be  paid  or  per- 
formed; a  clear  statement  of  just  what  is  agreed  upon,  when 
it  is  to  be  done,  and  in  what  manner;  together  with  any 
arrangements  the  parties  wish  to  make  if  something  happens 
to  render  the  contract  impossible  of  performance,  or  in  case 
it  is  only  to  be  performed  under  specified  conditions.  (See 
Chapter  XCVIII,  "Drafting  a  Contract.") 

Business  men  are  accustomed  to  expressing  themselves 
clearly,  concisely,  and  explicitly  in  their  letters.  Letters  and 
copies  are  always  carefully  filed  and  preserved.  For  this 
reason  when  legal  assistance  is  dispensed  with,  a  letter  from 
the  party  making  the  offer  and  a  reply  from  the  party  accept- 
ing or  rejecting  it  are  usually  the  most  satisfactory  method 
of  securing  a  written  contract.  Each  party  has  his  own 
records.  Since  they  are  accustomed  to  expressing  themselves 
by  letter,  they  understand  what  they  have  agreed  to  better 
than  if  the  terms  were  expressed  in  formal,  legal  phraseology. 
Even  if  a  lawyer  is  called  in  later,  the  exchange  of  letters  is 
a  good  way  of  making  an  agreement.  If  there  is  an  extended 
correspondence  before  the  parties  finally  arrive  at  an  agree- 
ment, the  last  letter  should  sum  up  all  the  terms  on  which 


HOW  CONTRACTS  ARE  MADE  59 

they  have  finally  agreed,  and  this  should  be  answered  by  a 
simple  letter  of  acceptance,  repeating  the  terms  as  therein 
stated.     (See  Chapter  C,  Forms  13,  14.) 

Note: 

I.    Write  all  contracts.    Never  trust  to  an  oral  under- 
standing. 

§  48.    The  Statute  of  Frauds 

In  order  to  do  away  with  the  uncertainty  of  relying  on 
people's  memories  in  contracts  by  word  of  mouth,  there  was 
passed  in  England  in  1676,  a  law  called  the  Statute  of  Frauds, 
which  required  certain  contracts  to  be  in  writing.  This  statute 
has  been  copied  into  the  law  of  most  of  the  states  of  the 
Union. 

The  Statute  of  Frauds  requires  that  the  contract  shall  be 
proved  by  some  memorandum  in  writing.  It  is  not  necessary 
to  make  the  memorandum  at  the  time  the  contract  is  agreed 
upon.  If  any  memorandum  or  letter  containing  the  essential 
terms  of  the  contract,  i.e.,  the  names  of  the  parties,  the  con- 
sideration, and  enough  to  show  the  nature  of  the  agreement, 
and  signed  by  the  party  to  be  held,  is  written  at  any  time 
before  the  other  party  comes  into  court  to  enforce  the  con- 
tract, the  requirements  of  the  law  are  satisfied. 

Form  of  the  Memorandum.  The  memorandum  must  be 
signed  by  the  party  against  whom  it  is  to  be  enforced,  or  he 
will  not  be  liable  under  it.  It  need  not  be  signed  by  the  other 
party.  Under  the  law  as  enacted  in  some  states,  this  signature 
must  be  at  the  end;  in  others  it  is  sufficient  if  it  is  put  in  any 
part  of  the  memorandum  with  the  intention  of  signing.  This 
written  memorandum  need  not  be  one  paper ;  it  may  be  written 
on  two  or  three  sheets  if  all  refer  to  each  other  plainly  and 
together  make  a  complete  memorandum  of  the  terms  of  the 
contract.    At  an  auction  or  a  sheriff's  sale,  the  auctioneer  or 


6o  CONTRACTS 

the  sheriff  is  the  agent  for  both  of  the  parties  and  may  sign 
a  memorandum  for  either  of  them. 

Contracts  Which  Must  Be  in  Writing.  The  following 
contracts  must  be  proved  by  a  written  memorandum: 

1.  A  contract  where  the  consideration  is  marriage. 

2.  The  promise  of  an  executor  or  an  administrator  to 
pay  a  claim  against  an  estate  which  is  in  his  charge  out  of 
his  own  money.  If  any  property  of  the  estate  is  left,  the 
claim  will  be  payable  out  of  that,  but  in  any  case  the  executor 
or  the  administrator  will  not  be  liable  personally  unless  there 
is  a  written  agreement. 

3.  A  promise  to  be  responsible  for  the  debt,  the  default, 
or  the  miscarriage  of  another.  This  means  a  contract  of 
suretyship  or  guaranty,  which  will  be  explained  later.  (See 
Part  XIII,  "Suretyship.") 

4.  A  contract  for  the  sale  of  land  or  of  any  interest  in 
land.  This  does  not  refer  to  a  deed,  but  to  a  contract  to 
give  a  deed.  A  deed  must  always  be  in  writing.  A  deed 
which  is  not  in  proper  form  to  operate  as  a  deed  may  some- 
times operate  as  a  contract  to  sell  the  property,  and  the  party 
will  be  compelled  to  give  a  good  deed.  A  defective  deed  can- 
not be  corrected  without  much  trouble. 

If  a  person  makes  a  contract  to  sell  or  to  buy  land  through 
an  agent,  the  agent  must  in  most  states  be  given  authority 
in  writing  to  sign  the  contract. 

Growing  things,  such  as  trees,  grass,  and  plants  that  come 
up  of  themselves  every  year  are  regarded  as  part  of  the  land, 
and  a  contract  to  sell  or  to  buy  them  must  be  in  writing. 
Crops  which  have  to  be  planted  every  year  are  not  regarded 
as  part  of  the  land  even  while  they  are  growing. 

A  lease  of  real  property,  if  it  is  to  last  for  over  a  year, 
must  usually  be  in  writing. 

5.  A  contract  which  is  not  to  be  performed  within  a  year 
from  the  time  it  was  made.    A  contract  which  might  possibly 


HOW  CONTRACTS  ARE  MADE  6 1 

be  performed  in  a  year,  although  it  might  take  longer,  need 
not  be  in  writing  to  be  enforceable.  It  is  always  better,  how- 
ever, to  have  such  a  contract  in  writing. 

6.  A  contract  for  the  sale  of  personal  property  of  over 
a  certain  fixed  amount  in  value.  (This  is  explained  fully  in 
Chapter  XVII,  "The  Statute  of  Frauds.") 

Note: 

I.  The  fact  that  an  oral  contract  may  be  unenforceable 
because  of  the  Statute  of  Frauds  is  another  reason 
why  all  contracts  should  be  in  writing. 

§  49.     Contracts  Under  Seal 

The  use  of  the  seal  is  a  survival  from  the  time  when  very 
few  people  could  read  or  write.  The  seal  was  used  on  the 
most  important  documents  as  we  use  a  signature  today.  Be- 
cause of  the  importance  that  was  attached  to  it  then,  the  seal 
is  still  used  on  documents  of  the  greatest  importance. 

Deeds  and  mortgages  of  land,  and  in  some  states  wills, 
must  be  under  seal.  A  power  of  attorney  to  deed  land  also 
requires  a  seal.  A  seal  on  any  document,  such  as  a  deed  or  a 
contract,  is  regarded  as  showing  that  there  was  consideration 
for  the  deed  or  the  agreement  whether  any  is  mentioned  in  the 
document  itself  or  not.  In  this  country,  however,  a  person 
is  usually  allowed  to  prove  that  there  was  no  consideration, 
even  if  there  is  a  seal. 

A  seal  may  in  many  states  be  merely  a  scroll.  In  others 
a  little  red  wafer  is  used.  In  New  York  the  letters  L.S.  {locus 
sigilli,  the  place  of  the  seal)  which  were  originally  intended 
as  instructions  as  to  where  the  seal  should  be  placed,  are  now 
regarded  as  a  sufficient  seal. 

A  corporation  generally  verifies  papers,  particularly  im- 
portant documents,  with  its  corporate  seal. 

A  contract  under  seal  is  also  called  a  contract  by  specialty. 


62  CONTRACTS 

The  word  "covenant"  is  applied  as  follows:  (i)  It  may  be 
a  written  agreement  under  seal;  (2)  It  may  be  a  modifying 
agreement  contained  within  a  deed  or  other  sealed  instrument ; 
(3)  It  may  be  a  clause  of  an  agreement  contained  in  a  sealed 
instrument. 

Note: 

I .  Seals  are  generally  required  in  connection  with  legal 
papers  dealing  with  real  estate,  on  bonds,  and 
sometimes  on  wills. 

§  50.    Contracts  of  Record 

Contracts  may  be  distinguished  as  to  whether  or  not  they 
are  of  public  record;  that  is,  filed  or  recorded  in  some  court 
or  public  office.  The  highest  form  of  contract  of  record  would 
be  a  judgment,  which  may  be  called  a  contract  of  record 
although  it  lacks  any  element  of  a  contract.  It  may  be  founded 
upon  a  contract,  but  when  a  judgment  has  been  secured  so 
tnat  it  is  of  record,  it  becomes  a  claim  that  can  be  collected 
at  any  time  at  the  option  of  the  party  in  whose  favor  it  has 
been  rendered. 

Another  form  of  contract  of  record  is  what  is  called  a 
recognizance.  In  certain  legal  procedures  a  party  is  required 
to  give  bond  or  furnish  surety  that  he  will  appear  before  the 
court  at  a  certain  time  or  that  he  will  keep  the  peace,  observe 
the  terms  of  an  injunction,  or  do  some  other  thing.  Though 
this  is  a  compulsory  proceeding,  and  has  no  single  trace  of  an 
agreement  or  a  consideration,  it  is  nevertheless  called  a  con- 
tract of  record. 

Other  contracts  of  record  are  deeds,  mortgages,  contracts 
to  convey  land,  or  other  instruments  which,  after  being  ac- 
knowledged before  a  notary  public,  are  filed  or  recorded  in 
the  office  of  registry  for  record  for  the  particular  locality. 
Acknowledgment    is    a    prerequisite    to    registration.      (See 


HOW  CONTRACTS  ARE   MADE  63 

Chapter  XCIX.)  These  have  been  referred  to  already  as 
contracts  under  seal  because  most  of  them  are  evidenced  by 
a  seal. 

§  51.     Express  and  Implied  Contracts 

An  express  contract  is  a  contract  the  terms  of  which  have 
been  spoken  or  written  and  agreed  to  by  both  parties.  It  is 
called  an  express  contract  in  contradistinction  to  implied  con- 
tracts which  arise  by  inference  and  not  from  express  words. 

An  implied  contract  is  a  contract  that  arises  where  no 
promise  has  been  expressed.  If  a  man  orders  goods  from 
a  dealer  it  is  implied  that  he  means  to  pay  for  them,  not  any 
price  that  the  dealer  might  charge,  but  at  their  reasonable 
value.  It  is  not  necessary  that  he  should  promise  to  pay  for 
the  goods.  If  he  orders  them  the  promise  to  pay  is  implied 
or  understood. 

If  one  person  accepts  the  benefit  of  another's  services, 
the  law  holds  that  a  contract  to  pay  for  them  at  what  they 
are  reasonably  worth  is  implied,  and  the  person  who  performs 
the  service  may  claim  compensation  in  court. 

The  same  reasoning  holds  if  a  person  occupies  land,  build- 
ings, or  rooms.  The  law  implies  a  promise  to  pay  a  reasonable 
rent.  If  two  people  have  a  running  account  with  each  other, 
the  law  considers  that  they  have  promised  each  other  that  the 
one  from  whom  a  balance  is  found  to  be  due  shall  pay  that 
balance  to  the  other.  The  promise  to  pay  is  based  on  the  fact 
that  the  party  has  willingly  taken  the  benefit  of  what  was  done. 
If  something  was  done  for  him  without  his  making  any  re- 
quest, and  without  his  afterwards  making  any  use  of  it,  he 
could  not  be  charged  for  it. 

If,  without  orders,  a  man  left  bread  at  your  door  every 
morning,  and  you  used  it,  the  law  would  imply  a  promise  on 
your  part  to  pay  for  the  bread.  If  he  put  a  new  roof  on  your 
house  in  your  absence  without  orders,  he  could  not  collect  for 


64  CONTRACTS 

it,  because  you  would  have  to  use  the  new  roof  whether  you 
desired  such  repair  or  not.  In  case  the  person  who  performed 
the  service  intended  to  do  it  without  claiming  payment  for  it, 
it  would  be  a  gift  and  there  would  be  no  implied  contract  to 
pay  for  it. 

Note: 

I.  It  is  always  most  satisfactory  to  have  a  distinct 
understanding  as  to  prices  for  services  rendered. 
Even  lawyers,  dentists,  and  plumbers  are  some- 
times believed  to  overvalue  their  services. 

§  52.    Quasi  Contracts 

It  will  require  close  observation  to  distinguish  implied  con- 
tracts from  quasi  contracts.  A  quasi  contract  is  a  contract 
implied  in  law  from  the  circumstances  and  without  regard 
to  the  intention  of  the  party  who  is  bound.  For  example, 
a  man  staying  at  a  hotel  suddenly  dies.  The  proprietor  of 
the  hotel  calls  in  an  undertaker  who  takes  charge  of  the 
funeral  preparations.  The  undertaker  sends  his  bill  to  the 
executors  of  the  man's  estate.  In  this  instance  there  was  no 
consent  on  the  part  of  the  man  or  his  representatives,  yet  by 
law  it  was  implied  that  his  estate  should  be  bound  for  the 
obligation,  and  that  there  was  a  quasi  contract  to  that  effect. 

The  following  is  another  case  of  quasi  contract:  In  Cali- 
fornia a  law  was  passed  providing  for  a  certain  number  of 
pilots  to  meet  ships  coming  into  the  bay  of  San  Francisco 
and  take  the  ships  in.  Each  ship  was  to  pay  its  pilot  a  certain 
sum.  Therefore,  if  a  pilot  took  the  trouble  to  go  out  to  meet 
a  ship  and  the  officers  did  not  wish  his  services,  he  would  have 
to  be  paid  a  sum,  if  not  the  full  and  usual  fee,  enough  to  pay 
for  his  time  and  trouble  in  meeting  the  ship. 


HOW  CONTRACTS  ARE  MADE  65 

§  53.    Executory  and  Executed  Contracts 

An  executory  contract  is  a  contract  that  has  been  made 
but  has  not  as  yet  been  carried  into  effect. 

An  executed  contract  is  one  that  has  been  carried  into 
effect  by  both  parties.  A  contract  that  has  been  carried  out 
by  one  party  and  not  the  other  would  be  executory  from  one 
point  of  view  and  executed  from  the  other  point  of  view. 

§  54.    Conditions  Precedent  and  Subsequent  , 

A  condition  precedent  is  something  to  be  performed  before 
the  other  party  can  be  required  to  do  his  part.  It  is  some- 
times called  an  executory  condition.  In  the  usual  contract  of 
employment  it  is  necessary  to  do  the  stipulated  work  before 
there  is  any  claim  for  payment.  The  performance  of  the  work 
is  the  condition  precedent.    (See  also  §§  109,  no.) 

A  condition  subsequent  is  a  condition  attached  to  a  con- 
tract the  fulfilment  of  which  will  discharge  the  obligation. 
The  simplest  instance  of  this  is  the  purchase  of  goods  with 
the  privilege  of  returning  them  within  a  certain  number  of 
days  after  the  goods  are  sold.  If  the  goods  are  returned  the 
contract  of  sale  is  annulled,  and  the  purchaser  is  not  liable 
for  the  price,  or  if  he  has  paid  he  will  be  entitled  to  have  the 
amount  refunded. 

A  chattel  mortgage  is  another  instance  of  a  condition  sub- 
sequent. If  the  condition  is  performed  and  the  payment 
secured  or  made,  the  chattel  mortgage  becomes  void  and  the 
person  who  makes  the  payment  has  clear  title  to  the  goods. 

§  55-    Void  and  Voidable  Contracts 

A  void  or  unenforceable  contract  is  one  which  has  no 
legal  effect  and  on  that  account  cannot  be  enforced.  It  is  not 
necessarily  an  illegal  contract,  though  an  illegal  contract  would 
be  a  void  contract. 

A  voidable  contract  is  not  absolutely  void,  but  it  can  be 


66  CONTRACTS 

avoided  by  one  of  the  parties  concerned.  A  contract  with  a 
minor  can  be  enforced  by  the  minor  but  if  he  does  not  wish 
to  carry  it  out  he  can  avoid  it.     (See  §  38,  "Minors.") 

§  56.    Drafting  a  Contract 

Where  an  important  contract  is  to  be  drawn  up,  a  lawyer 
should  be  employed.  Where  the  contract  involves  nothing 
more  than  a  simple  sale,  a  contract  of  hiring  or  other  ordinary 
business  transaction,  any  intelligent  man  who  knows  how  to 
use  the  English  language  should  be  able  to  draw  up  a  plain, 
understandable  statement  of  what  the  parties  undertake  to  do. 
A  chapter  in  the  latter  part  of  this  book  has  been  given  to  this 
subject.    (See  Chapter  XCVIII,  "Drafting  a  Contract") 


Review  Questions 

1.  Classify  contracts  as  to  grade  or  ease  of  legal  proof.    What  is 

the  difference  between  simple  and  formal  contracts? 

2.  How  must  an  oral  contract  be  proved? 

3.  What  data  should  a  written  contract  contain? 

4.  What  is  the  Statute  of  Frauds?     What  was  the  object  of  it? 

By  whom  must  the  required  memorandum  be  signed?    Which 
are  the  contracts  that  must  be  in  writing? 

5.  Where  must  written  contracts  be  signed  in  your  state? 

6.  In  marriage,  is  the  contract  a  written  one? 

7.  When  is  one  liable  for  a  debt,  default,  or  miscarriage  of  another? 

Does  a  loan  have  to  be  evidenced  by  writing? 

8.  Is  an  oral  contract  to  sell  real  estate  enforceable?    Give  reason 

for  answer. 

9.  What  amount  of  personal  property  would  require  a  written  con- 

tract for  its  sale  in  your  state? 

10.  Would  a  contract  to  write  a  book  have  to  be  in  writing? 

11.  What  instruments  require  a  seal?     What  form  of  seal  is  re- 

quired? What  is  a  contract  by  specialty?  What  is  a  covenant? 

12.  Define  contracts  of  record.    What  is  a  recognizance?    What  is 

the  object  of  acknowledgment? 


HOW  CONTRACTS  ARE  MADE  67 

13.  What  is  the  difference  between  express  and  implied  contracts  ? 

14.  What  is  a  quasi  contract? 

15.  What  is  the  difference  between  an  executory  and  an  executed 

contract?     May   a   contract   be   executed   on   one    side   and 
executory  on  the  other? 

16.  What  is  a  condition  precedent  ?    What  is  a  condition  subsequent  ? 

17.  What  is  the  difference  between  a  void  and  a  voidable  contract? 

If  you  contracted  to  rent  a  house  that  burned  before  the  tenant 
moved  in,  would  it  be  illegal?    Would  it  be  a  void  contract? 


CHAPTER  VIII 

EFFECT  OF  CONTRACTS 

§  57.    Illegal  Contracts 

What  constitutes  an  illegal  contract  has  been  explained  in 
§  39.  The  point  to  make  is  that  no  contract  which  is  against 
the  law  or  against  public  policy  can  be  enforced.  If  the  parties 
come  into  court,  both  are  equally  chargeable  with  knowledge 
of  the  law  and  therefore  with  guilt  in  breaking  it;  and  the 
court  will  refuse  to  help  either  or  to  interfere  at  all.  If  one 
of  them  has  been  defrauded  out  of  his  property  by  inability 
to  enforce  the  contract,  that  constitutes  his  punishment  for  en- 
tering into  such  a  contract.  Such  a  party  cannot  get  his 
property  back  nor  can  he  enforce  the  contract. 

There  is  a  legal  maxim  to  the  effect  that  "ignorance  of  the 
law  excuses  no  one."  This  seems  harsh,  but  it  is  rigidly  en- 
forced. Therefore,  if  there  is  any  doubt  about  the  legality 
of  a  contract,  the  parties  should  assure  themselves  that  it  is 
in  accordance  with  the  law.  Ignorance  or  good  intentions 
will  not  excuse  a  man  if  he  makes  an  illegal  contract.  (See 
also  §  59.) 

Sunday  Contracts.  In  almost  every  state  contracts  made 
or  to  be  performed  on  Sunday  are  illegal,  unless  they  are  for 
some  purpose  of  charity,  necessity  or  mercy.  To  be  necessary, 
however,  the  thing  done  must  be  something  intended  to  pre- 
serve life,  health  or  property. 

§  58.    Effect  of  Mistakes 

There  are  two  kinds  of  mistakes  possible  in  making  a 
contract : 

68 


EFFECT  OF  CONTRACTS  69 

1.  A  mistake  as  to  whom  one  is  dealing  with,  what  the 

agreement  is  about,  or  what  is  to  be  done  under 
the  contract. 

2.  A  mistake  as  to  the  quahty  or  the  value  of  the  sub- 

ject the  contract  deals  with,  or  its  legal  effect. 

A  mistake  under  the  first  heading  will  mean  that  there  is 
no  contract.  A  party  cannot  be  forced  to  observe  a  contract 
with  someone  with  whom  he  did  not  intend  to  contract,  or  in 
regard  to  something  he  did  not  consider.  The  parties  must 
be  considering  the  same  thing  and  must  be  agreed  as  to  what 
is  to  be  done  about  it,  or  there  is  no  meeting  of  their  minds 
and  no  contract. 

If,  however,  there  was  no  mistake  as  to  the  parties,  or  as 
to  what  the  contract  was  about  or  what  was  to  be  done,  the 
fact  that  either  or  both  of  the  parties  believed  that  the  subject 
of  the  contract  was  more  or  less  valuable  than  it  actually  was 
will  not  make  any  difference  as  to  its  binding  effect.  An 
agreement  has  been  made  and  they  will  be  held  to  it  even 
if  it  means  loss  to  one  of  them. 

Neither  will  it  make  any  difference  if  either  or  both  of  the 
parties  did  not  realize  that  he  would  be  bound  by  the  contract 
or  did  not  know  just  what  he  was  required  to  do  under  the 
law  to  carry  out  his  agreement.  Every  man  is  supposed  to 
know  the  law,  and  it  is  his  own  fault  if  he  failed  to  find  out 
about  it  in  the  first  place. 

If  a  person  knows  that  the  instrument  he  is  signing  is  a 
contract,  and  fails  to  read  it,  he  will  be  bound  by  it  even  though 
it  is  a  contract  to  do  something  entirely  different  from  what 
he  intended.  No  one  should  ever  sign  contracts  without  read- 
ing them. 

In  case,  however,  through  the  fault  of  some  clerk  in  writ- 
ing the  contract  an  error  of  some  sort  gets  into  the  written 
document  so  that  it  misrepresents  the  actual  agreement  be- 


70 


CONTRACTS 


tween  the  parties,  the  court  will  order  it  rewritten  to  express 
what  they  really  agreed  upon.  That  is,  a  clerical  error  will 
be  corrected. 

Note: 

I.  The  terms  of  a  contract  should  be  written  down 
clearly  and  in  simple  language.  Both  parties 
should  then  read  them  over,  and  any  questions 
that  arise  should  be  cleared  up  before  signing. 
Much  trouble  and  litigation  would  be  saved  if 
this  course  were  followed  in  all  cases. 

§  59.     Effect  of  Fraud 

If  there  is  any  fraud  in  Inducing  a  party  to  enter  into  a 
contract,  he  may  refuse  to  perform  his  share  of  the  agreement. 
If  the  contract  is  already  carried  out,  he  may  recover  his 
property  or  its  value.  If  he  wants  to  annul  the  contract,  how- 
ever, he  must  return  anything  he  has  received  under  it  unless 
it  has  been  used  up  or  destroyed  at  the  time  he  discovers  the 
fraud.  If  he  prefers,  he  may  let  the  contract  stand  and  claim 
damages  for  any  loss  he  may  have  suffered. 

What  Constitutes  Fraud.  If  any  false  representation  is 
made  by  a  person  who  knows  It  to  be  false  or  has  no  positive 
belief  or  adequate  knowledge  in  regard  to  the  matter,  intending 
to  induce  action  and  to  create  a  false  impression  in  the  other 
party's  mind,  or  to  prevent  him  from  investigating  to  find  out 
the  truth  about  the  transaction.  It  amounts  to  a  fraud.  Mis- 
statements about  unimportant  matters,  or  mere  expressions  of 
opinion  in  recommending  an  article  for  sale,  do  not  affect  the 
contract.  The  buyer  must  be  on  his  guard  against  overstate- 
ments of  opinion  by  the  seller  as  to  the  virtues  of  the  article 
he  is  selling.    Overstatements  are  to  be  expected  everywhere. 

When  a  party  relies  on  the  opinion  of  an  expert,  however, 
or  when  he  seeks  advice  from  a  person  in  whom  he  has  a 


EFFECT  OF  CONTRACTS  71 

right  to  repose  confidence,  such  as  a  father,  a  guardian,  or  an 
attorney,  it  is  a  different  matter.  Then  an  expression  of 
opinion  without  sound  grounds  would  amount  to  fraud. 

If  the  reading  of  a  contract  be  dispensed  with  as  the  result 
of  fraud,  the  injured  party  may  refuse  to  live  up  to  the  terms 
of  the  contract,  or  he  may  claim  damages  for  the  injury  sus- 
tained. This  rule  holds  good  also  whenever  the  legal  effect 
of  the  contract  has  been  misrepresented  or  when  a  fraudulent 
value  is  placed  on  that  which  is  being  bought  or  sold. 

The  injured  party  must  act  promptly  as  soon  as  he  dis- 
covers the  fraud.  By  delay  he  may  lose  his  rights,  since  he  will 
be  considered  to  be  content  with  the  terms  of  the  contract. 

Taking  advantage  of  another  person's  mistake  is  fraud. 

In  Shelton  v.  Ellis,  Shelton  &  Co.  learned  of  a  mistake  in 
the  rate  sheet  of  the  Western  and  Atlantic  Railroad  Company 
by  which  the  fare  from  Atlanta,  Ga.,  to  Rogers,  Ark.,  was 
quoted  as  $21.25  when  it  should  have  been  $36.70.  They  in- 
duced Garland,  a  traveling  salesman,  to  buy  a  large  number  of 
tickets  for  them  before  the  railroad  company  discovered  the 
mistake.    The  court  held  that  the  tickets  must  be  returned.^ 

If  any  part  of  the  representations  which  induced  the  other 
party  to  enter  into  the  contract  was  fraudulent  and  had  any 
effect  in  inducing  him  to  agree  to  it,  the  fact  that  most  of  the 
representations  were  honest  will  not  make  the  contract  good. 
But  if  the  fraudulent  representations  referred  to  matters  of  no 
consequence  and  were  not  material  to  the  contract  they  will  not 
affect  it.  Also,  if  the  other  party  relied  on  his  own  judgment 
in  the  matter,  rather  than  upon  what  was  told  him,  the  fraudu- 
lent misrepresentations  will  make  no  difference. 

What  Fraud  Will  Nullify  a  Contract.  Fraud  in  any  of  the 
negotiations  leading  up  to  a  contract  will  nullify  it.  If  fraud 
has  prevented  the  party  from  making  an  independent  investi- 
gation, or  if  it  has  led  him  astray  in  regard  to  the  facts,  it  will 

■  70  Ga.  297. 


72  CONTRACTS 

« 
make  the  contract  void.     Fraud  not  connected  with  the  im- 
mediate contract  but  with  previous  negotiations  will  not  aflfect 
the  present  contract. 

Specious  Schemes.  Ordinary  people  of  the  salaried  and 
the  professional  classes  lose  money  running  up  into  millions 
of  dollars  by  investing  in  all  sorts  of  specious  get-rich-quick 
schemes.  If  they  would  study  the  prospectuses  of  these 
schemers,  they  would  see  how  carefully  they  are  written  so  as 
to  avoid  any  positive  statements  but  to  give  a  strong  impres-- 
sion  by  a  series  of  carefully  worded  opinions,  estimates,  etc. 
Such  phrases  as,  "it  is  estimated,"  "it  is  expected,"  "there  is 
every  reason  to  believe,"  "it  is  the  opinion  of  old  miners," 
are  used  again  and  again.  It  is  astonishing  how  plausible  a 
prospectus  can  be  made  without  giving  any  positive  statement, 
except  as  to  comparatively  immaterial  matters.  The  important 
matters  in  deciding  upon  an  investment  are: 

1.  The  character  and  the  experience  of  the  manage- 

ment. 

2.  The  amount  of  capital  there  will  be  available. 

3.  The  subject  matter  of  the  business. 

On  these  essential  points  there  is  rarely  any  positive  in- 
formation in  prospectuses  of  this  sort. 

Note: 

I.     Consult  your  own  lawyer  or  banker  before  investing 
money. 

§  60.     Duress 

A  party  must  consent  to  a  contract  of  his  own  free  will. 
That  is  the  essential  element  of  an  agreement.  Consequently, 
if  his  will  is  overpowered  by  that  of  someone  else,  the  result 
cannot  be  a  contract  that  will  hold  him. 

There  are  two  ways  in  which  a  person  may  induce  another 
party  to  make  a  contract  against  his  own  free  will.    One  is  by 


EFFECT  OF  CONTRACTS  73 

the  use  of  intimidation  or  force,  the  other  is  by  taking  ad- 
vantage of  mental  weakness  or  of  affection  to  influence  him. 

If  a  party  signs  a  contract  in  order  to  escape  from  im- 
prisonment or  detention  of  some  kind,  he  has  signed  under 
duress  and  not  of  his  own  free  will  and  the  contract  cannot  be 
enforced.  If  he  signs  it  in  fear  of  immediate  bodily  harm, 
which  he  has  every  reason  to  believe  the  other  party  is  capable 
of  inflicting,  the  same  holds  true.  In  a  case  where  there  is  no 
detention  but  merely  threats,  the  threats  must  be  either  of 
bodily  harm  or  of  imprisonment  to  the  person  himself  or  to 
some  member  of  his  family,  or  of  an  injury  to  his  property, 
and  must  have  been  made  under  such  circumstances  that  a  man 
could  reasonably  believe  that  there  was  immediate  danger  of 
their  being  carried  out. 

As  soon  as  a  party  escapes  from  duress  or  from  fear  of  the 
threats  that  coerced  him,  he  may  rescind  his  contract  and  re- 
cover any  property  or  other  consideration,  or  value  therefor, 
that  was  taken  from  him  under  the  contract. 

§  61.     Undue  Influence 

Undue  influence  is  when  one  party  takes  advantage  of 
another  through  near  relationship,  such  as  that  of  attorney  and 
client,  doctor  and  patient,  guardian  and  ward,  etc. ;  or  when  the 
second  party  is  mentally  weak  and  at  the  mercy  of  his  more 
keen-witted  fellow  men.  A  deficient  person  can  hardly  be  said 
to  exercise  his  own  free  will ;  contracts  can  readily  be  imposed 
upon  him  by  others,  and  when  this  imposition  can  be  proved, 
contracts  made  with  him  have  no  legal  standing. 

When  a  person  takes  advantage  of  mental  weakness,  or  of 
near  relationship,  or  of  confidence  reposed  in  him  to  influence 
another  person  to  make  a  contract,  it  is  not  the  free  action  of 
the  second  party  and  is  no  contract.  People  who  are  merely 
friends  are  not  considered  to  be  in  such  a  position  that  the  one 
can  exercise  an  undue  influence  over  the  other.     Where  the 


74  CONTRACTS 

consideration  for  a  contract  is  plainly  inadequate,  it  may  raise 
a  suspicion  of  undue  influence. 

If  the  person  recovers  his  mental  health,  or  is  separated 
from  the  party  who  influenced  him,  he  may  refuse  to  carry 
out  his  contract  and  recover  anything  he  has  turned  over  to 
the  other  party  under  it. 

His  friends  and  relatives  may  also  act  for  him  in  order  to 
protect  his  property  while  he  is  still  under  the  influence  of  the 
other  party,  or  too  incapacitated  mentally  to  act  for  himself. 

Note: 

I.     No  contract  is  of  any  value  unless  it  is  made  by  the 
free  and  unbiased  will  of  both  parties. 

§  62.     Law  as  to  Alteration 

Any  alteration  in  a  written  contract  by  one  of  the  parties 
without  the  consent  of  the  other,  makes  the  contract  of  no 
effect  as  against  the  other. 

The  parties  to  a  contract  may  alter  it  if  they  can  agree  on 
the  changes  to  be  made.  If  it  is  a  written  contract,  one  of  the 
parties  may  make  the  alterations  in  the  contract  itself  with  the 
consent  of  all  the  other  parties,  or  the  parties  may  make  a  new 
written  contract.  If  parties  attempt  to  modify  a  written  con- 
tract by  an  oral  agreement  there  must  be  a  new  consideration 
for  it  distinct  from  that  of  the  original  contract,  so  that  in 
effect  a  new  and  oral  contract  has  been  made. 

A  New  Agreement.  If  the  same  parties  make  a  new  agree- 
ment about  the  same  subject  which  is  entirely  inconsistent  with 
the  old  agreement,  the  old  agreement  will  be  regarded  as  set 
aside  by  the  new.  If,  however,  there  is  any  part  of  it  which 
is  not  inconsistent  with  the  new,  that  part  still  remains  en- 
forceable.   ( See  also  §  69. ) 

If  one  of  the  parties  to  a  contract  makes  alterations  in  it 
without  the  consent  of  the  other  parties  to  it,  this  amounts 
to  fraud,  and  the  contract  becomes  unenforceable  by  the  guilty 


EFFECT  OF  CONTRACTS  75 

> 

party.  If  a  person,  not  a  party  to  the  contract,  and  not  acting 
for  any  of  the  parties  to  it,  should  make  alterations  in  it, 
they  would  be  treated  as  though  they  did  not  exist.  The  nature 
of  the  original  contract  could  be  proved  by  the  testimony  of 
the  parties,  and  the  contract  would  be  enforced  as  it  stood 
before  the  alterations  were  made. 

Filling  in  a  Contract.  If  the  contract  is  not  complete,  how- 
ever, but  blank  spaces  have  been  left  for  any  of  the  terms  to 
be  filled  in  later,  any  party  to  it  to  whom  it  is  entrusted  may 
fill  out  the  blank  spaces  in  any  way  which  would  be  consistent 
with  the  other  terms  of  the  contract  and  enforce  it  as  he  has 
made  it.  If  he  were  given  instructions  for  filling  it  out,  he 
himself  could  not  enforce  any  other  contract  than  one  that  was 
in  accordance  with  the  instructions,  but  he  might  fill  it  out 
contrary  to  the  instructions  and  transfer  it  to  another  party, 
who,  knowing  nothing  of  the  instructions,  would  be  entitled 
to  enforce  it  as  he  received  it.  This  question  arises  more  often 
in  the  case  of  negotiable  instruments  and  will  be  spoken  of 
under  that  heading.     (See  §  161.) 

Notes: 

1.  The  best  way  to  change  an  existing  contract  is  to 

make  a  new  written  agreement  signed  by  all  the 
parties. 

2.  A  new  contract  may  be  made  by  letters  if  they  point 

out  clearly  what  the  new  agreement  is. 

3.  It  is  not  safe  to  leave  any  written  instrument  with 

unfilled  blanks. 

§  63.     Interpretation  of  Contracts 

A  contract  should  be  so  clear  that  its  meaning  may  be  easily 
understood.  As  a  matter  of  fact,  many  contracts  are  far 
from  clear  and  all  sorts  of  disputes  arise  over  their  meaning. 
A  contract  should  be  interpreted  so  as  to  carry  out  the  in- 
tention of  the  parties  as  nearly  as  may  be.     The  court  will 


76  CONTRACTS 

try  to  interpret  a  contract  in  such  manner  as  to  make  it  lawful 
and  enforceable.  In  this  matter  law  and  common  sense  coin- 
cide. A  contract  will  be  interpreted  according  to  the  law  of 
the  state  where  it  was  entered  into. 

In  getting  at  the  intention  of  the  parties  where  the  contract 
is  not  clear,  anything  which  is  unessential  and  tends  to  confuse 
the  meaning  will  be  disregarded.  If  there  are  two  statements 
which  absolutely  conflict,  the  court  will  consider  that  the  first 
gives  the  true  meaning  and  will  disregard  the  latter. 

The  parties  may  bring  in  evidence  to  show  the  meaning 
of  any  technical  terms  which  were  used,  or  to  prove  some 
well-recognized  custom  or  usage  of  business  which  will  explain 
the  meaning  of  certain  terms,  or  which  may  be  considered 
part  of  the  contract. 

If  a  contract  refers  to  any  other  papers  or  documents, 
these  will  be  read  in  connection  with  it. 

Rules  to  Ascertain  Meaning  of  Contracts.  There  are  cer- 
tain general  rules  which  the  court  will  always  follow  to  get 
at  the  meaning  of  a  contract.  One  is  that  in  a  printed  form 
which  has  been  filled  out,  if  the  written  and  the  printed  words 
are  inconsistent,  the  court  will  disregard  the  printed  words 
and  follow  the  written  ones.  If  any  words  or  phrases  are 
inconsistent  with  the  rest  of  the  contract,  and  a  clear  intention 
can  be  gathered  from  the  rest  without  them,  the  court  will 
treat  them  as  surplusage. 

If  a  general  term  is  used,  such  as  an  agreement  to  do  the 
"mason  work"  on  a  building,  and  it  is  followed  by  the  mention 
of  any  specific  kinds  of  mason  work,  such  as  "stone  and  brick 
work,"  "plastering,"  etc.,  it  is  a  contract  to  do  only  the  special 
kinds  of  mason  work  mentioned  and  not  all  the  mason  work 
on  the  building.  In  order  to  make  a  general  contract  for  all 
the  mason  work,  this  intention  should  be  clearly  stated. 

If  any  of  the  terms  of  a  contract  were  intentionally  made 
ambiguous  by  one  of  the  parties  for  the  purpose  of  taking 


EFFECT  OF  CONTRACTS  .     77 

advantage  of  the  other  party,  the  court  will  interpret  the 
doubtful  terms  in  the  way  that  will  least  favor  the  party  at 
fault. 

In  trying  to  decide  what  the  parties  intended  where  the 
meaning  is  doubtful,  the  court  will  be  influenced  by  the  words 
and  the  acts  of  the  parties  at  the  time  of  making  the  agree- 
ment, or  the  manner  in  which  they  have  carried  it  out  since. 
Their  manner  of  carrying  out  the  conditions  shows  what  they 
understood  by  the  agreement. 

Notes: 

1.  A  contract  should  always  be  stated  in  the  simplest 

and  most  intelligible  language  possible,  and  the 
parties  should  go  over  it  carefully  to  make  sure 
that  all  of  the  terms  are  clear. 

2.  If  it  be  desired  to  make  it  with  reference  to  some 

particular  business  custom,  it  would  be  well  to 
mention  that  custom  in  the  contract  so  that  there 
can  be  no  doubt  that  both  of  the  parties  under- 
stood that  it  was  to  be  part  of  the  contract. 


Review  Questions 

1.  Is  the  rule  in  regard  to  ignorance  of  the  law  just?    Why  is  it 

enforced?  What  is  the  law  in  your  state  in  regard  to  Sunday 
contracts? 

2.  Explain  the  distinction  between  mistake  of  party,  subject  matter 

or  obligation,  and  mistake  of  the  quality,  value,  or  legal  effect. 

3.  What  is  the  effect  of  signing  a  contract  without  reading  it? 

If  the  party  had  dispensed  with  reading  because  of  fraudulent 
statements  of  the  other  party,  would  that  affect  the  situation? 
What  is  the  effect  of  a  clerical  error? 

4.  Broadly,  what  is  the  effect  of  fraud  on  a  contract?     What  is 

fraud  ? 

5.  Distinguish  between  misrepresentation  and  expression  of  opinion. 

When  is  the  expression  of  opinion  liable  to  be  fraudulent? 


78  CONTRACTS 

6.  Can  a  person  take  advantage  of  another  person's  mistake? 

7.  Do   fraudulent   representations  always   make  a   contract   void? 

What  are  the  exceptions? 

8.  How  are  prospectuses  worded  to  avoid  open  fraud?    What  are 

the  three  vital  points  in  any  proposed  investment? 

9.  What  does  "duress"  mean?    What  is  its  effect  on  a  contract? 

10.  What  is  meant  by  "undue  influence"?     What  is  its  legal  effect 

on  a  contract? 

11.  What  is  the  law  as  to  altering  a  contract?    What  is  the  best  way 

to  alter  a  contract?     Why? 

12.  Disputes  often  arise  over  the  interpretation  of  contracts.    Why? 

13.  What  is  the  object  of  the  rules  for  interpreting  contracts? 

14.  A  bought  a  cash  register  on  the  statement  that  it  would  save 

the  expense  of  a  bookkeeper  and  one-half  of  the  clerks'  time. 
After  a  short  time  he  alleges  that  the  statement  was  false 
and  seeks  to  rescind  the  sale  on  the  ground  of  fraud.  Was 
this  fraud,  or  statement  of  opinion,  and  what  is  the  result? 


CHAPTER  IX 

ASSIGNMENT  AND  NOVATION 

§  64.    Assignment  of  Contracts 

A  contract  which  calls  for  personal  services  cannot  be 
assigned  by  either  of  the  parties  to  it.  No  one  can  be  com- 
pelled to  work  for  a  person  unless  he  agrees  to  it;  and  no 
one  can  be  compelled  to  have  another  working  for  him  whom 
he  did  not  choose,  and  these  conditions  would  result  if  such 
contracts  could  be  assigned. 

A  contract  which  depends  on  the  skill,  ability,  or  trust- 
worthiness of  one  of  the  parties  to  it  cannot  be  assigned  by 
that  party,  but  may  be  assigned  by  the  other  party.  For 
example,  a  contract  to  write  a  poem  cannot  be  assigned  by 
the  poet,  but  may  be  assigned  by  the  pubhsher. 

The  rights  in  any  other  contract  may  be  assigned  by  cither 
of  the  parties  to  it  unless  there  is  something  said  in  the  con- 
tract to  forbid  it.  A  party  may  assign  a  contract  by  simply 
handing  the  written  contract  over  to  the  party  to  whom  he 
assigns  it,  or  by  informing  the  other  party  to  the  contract  by 
word  of  mouth  that  he  has  given  up  all  his  rights  under  it  to 
the  person  to  whom  he  wishes  to  assign  it. 

Where  the  party  desiring  to  assign  a  contract  is  under 
obligations  under  the  contract,  he  cannot  assign  tliese  without 
the  assent  of  the  other  party  to  the  contract  (see  §  65,  "Nova- 
tion") ;  otherwise  he  would  still  remain  liable  for  whatever 
he  had  bound  himself  to  do  or  to  pay  in  the  contract. 

Form  of  Assignment.  The  proper  way  to  assign  a  con- 
tract is  in  writing,  usually  on  the  back  of  the  contract,  if  it  is 
in  writing,  or  if  it  is  an  oral  contract,  by  a  written  assignment. 

79 


8o  CONTRACTS 

In  the  case  of  contracts  under  the  Statute  of  Frauds,  the  law 
requires  the  assignment  to  be  in  writing.  No  particular  form 
of  words  is  necessary  if  the  intention  to  transfer  all  the  rights 
in  the  contract  is  plain.     (See  Chapter  C,  Forms  i8  and  19.) 

Liabilities  of  the  Assignee.  A  person  to  whom  a  contract 
is  assigned  by  one  of  the  parties  becomes  liable  to  perform 
all  the  duties  of  the  party  who  assigns  the  contract.  He  re- 
ceives only  such  rights  as  the  original  party  enjoyed  under 
the  contract.  If  the  contract  was  obtained  by  fraud,  duress, 
or  undue  influence,  or  the  other  party  to  it  was  not  competent 
to  make  a  contract,  such  other  party  may  refuse  to  perform 
it  just  as  much  as  though  the  assignee  were  one  of  the  original 
parties. 

If  the  party  who  assigned  the  contract  owed  the  other 
party  anything  which  could  have  been  offset  against  the  con- 
tract, the  other  party  may  offset  that  amount  against  the 
person  to  whom  the  contract  has  been  assigned. 

Rights  of  Assignee.  If  a  party  should  assign  all  his  rights 
under  a  contract  to  one  person  and  afterwards  assign  them 
to  another,  the  second  person  would  get  no  rights  under  the 
contract.  If  the  party  assigned  only  part  of  his  rights  to 
the  first  person,  the  second  person  might  enforce  such  rights 
as  remained.  The  second  person  would  be  entitled  to  sue 
for  damages  the  party  who  claimed  to  assign  the  contract 
to  him. 

Subject  to  the  rights  of  the  other  party,  the  person  to 
whom  a  contract  has  been  assigned  may  bring  a  suit  to  enforce 
it  in  all  cases  where  the  party  who  assigned  it  to  him  would 
be  entitled  to  do  so.  In  some  states,  if  he  sues  in  a  court 
of  law,  he  must  bring  his  suit  in  the  name  of  the  person  who 
assigned  the  contract  to  him.  He  may  sue  in  a  court  of  equity 
in  his  own  name.  In  a  case  where  there  have  been  several 
assignments,  the  suit  must  be  brought  in  the  name  of  the  party 
who  gave  the  first  assignment. 


ASSIGNMENT  AND  NOVATION  8 1 

A  person  to  whom  a  contract  has  been  assigned  should 
notify  the  other  party  to  the  contract  at  once  that  the  rights 
under  the  contract  have  been  assigned  to  him.  If  there  has 
been  an  assignment  to  any  other  parties,  the  one  who  is  the 
first  to  give  this  notice  will  be  entitled  to  have  his -rights  en- 
forced first.  Then,  too,  it  prevents  the  other  party  from  pay- 
ing out  anything  to  the  person  who  has  assigned  the  contract. 
If  such  payment  has  been  made  in  ignorance  of  assignment, 
the  party  to  whom  the  contract  has  been  assigned  could  not 
compel  payment  again  to  himself. 

Notes: 

1.  All  contracts  which  do  not  involve  the  personal 

element  may  be  assigned  unless  prohibited  by  the 
law  or  by  public  policy. 

2.  Any  form  of  assignment  which  cuts  off  all  control 

of  the  assignor  over  the  contract  will  be  sufficient. 

3.  The  assignee  takes  all  the.  rights  which  the  original 

party  had  in  the  contract,  and  the  contract  is  sub- 
ject to  all  the  defenses  which  have  arisen  prior 
to  Its  assignment. 

4.  The  assignee  should  always  give  the  other  party 

prompt  notice  that  the  contract  has  been  assigned 
to  him. 

§  65.     Novation 

Novation  is  the  substitution  of  other  parties,  or  another 
party,  for  one  of  the  original  parties  to  the  contract. 

Where  John  Smith  has  an  agreement  with  Henry  Jones 
to  buy  a  horse  for  a  certain  sum,  and  instead  of  doing  so  he 
assigns  the  contract  to  Samuel  Brown,  and  Henry  Jones  agrees 
to  take  Samuel  Brown  as  party  to  the  agreement,  this  is  a 
novation.  Samuel  Brown  has  been  substituted  for  John  Smith 
in  the  contract,  which  can  now  be  enforced  against  him, 
Samuel  Brown. 


82  CONTRACTS 

Agreement  of  Parties.  In  order  to  constitute  a  good 
novation,  all  the  parties  must  agree  to  the  arrangement.  Henry 
Jones  must  discharge  John  Smith  from  his  agreement  to  pay 
for  the  horse,  and  take  Samuel  Brown's  agreement  in  place 
of  it;  John  Smith  must  have  assigned  all  his  interest  in  the 
contract  to  Samuel  Brown,  whose  agreement  to  pay  for  the 
horse  is  the  consideration  for  Henry  Jones's  acceptance  of 
him  as  a  substitute  for  John  Smith.  If  any  of  these  considera- 
tions are  lacking,  the  novation  will  not  be  enforceable. 

In  Ford  v.  Adams,^  Jacob  Schyer  owed  Ford  some  money. 
He  gave  a  written  order  to  Adams,  who  owed  him,  Schyer, 
to  deliver  40  cords  of  wood  to  Ford.  Ford  accepted  the 
substitution.  Adams  did  not  deliver  the  wood,  and  Ford 
sued  him  for  it.  The  court  said  that  there  was  not  a  good 
novation,  because  it  was  not  shown  that  Schyer  had  released 
Adams's  debt  to  him,  and  without  that  there  would  be  no 
consideration  to  Adams  for  his  promise. 

Notes: 

1.  To  constitute  a  good  novation,  the  other  party  to 

the  contract  must  accept  the  substitution  and  must 
release  the  party  making  it  from  his  obligation 
to  him. 

2.  The  party  making  the  novation  must  assign  to  the 

new  party  all  his  interest  in  the  contract. 

3.  All  of  the  parties  must  accept  the  new  arrangement. 


Review  Questions 

1.  Why  cannot  a  contract  for  personal  services  be  assigned? 

2.  Can  a  written  contract  be  assigned  orally? 

3.  Write  an  assignment  of  a  written  contract. 

4.  What  does  the  assignee  of  a  contract  have  to  do? 


'  3  Barb.  (N.  Y.)  349. 


ASSIGNMENT  AND  NOVATION  83 

5.  What  rights  would  an  assignee  have?     Can  an  assignor  relieve 

himself  of  his  liability  under  a  contract  by  making  an  assign- 
ment? 

6.  Why  should  an  assignee  notify  the  other  party  to  the  contract 

promptly  ? 

7.  What  is  novation?    How  many  parties  to  a  novation? 

8.  Distinguish  a  novation  from  an  assignment. 

9.  Write  an  assignment  of  an  account. 


CHAPTER  X 

/  DISCHARGE  OF  CONTRACTS 

§66.    Discharge  by  Performance 

The  usual  way  to  discharge  a  contract  is  by  performance 
or  fulfilment.  This  means  performance  by  both  of  the  parties. 
Performance  by  only  one  of  the  parties  releases  that  party 
from  liability  on  the  contract,  but  does  not  discharge  the 
contract  or  release  the  other  party  from  his  obligation. 

Under  the  old  common  law  rule,  the  performance  must 
be  strictly  in  accordance  with  the  provisions  of  the  contract. 
This  has  worked  so  much  hardship  and  real  injustice  that 
equity  has  modified  the  doctrine,  and  allows  a  substantial  per- 
formance with  damages  to  compensate  the  other  party  for 
any  loss  he  has  sustained. 

Substantial  Performance  in  Construction  Contracts.  If 
the  variations  in  performance  of  an  agreement  were  inten- 
tional, they  would  amount  to  breach  of  the  contract.  Where 
they  were  not  intentional,  the  other  party  is  entitled  to  deduct 
from  the  price  the  value  of  any  such  omissions  as  there  may 
have  been,  and  to  have  them  repaired  himself  if  he  desires. 
This  rule  applies  especially  to  construction  contracts,  and  even 
in  an  action  at  law  substantial  performance  will  be  sufficient. 

In  Heckman  v.  Pinkney,  Heckman  had  a  contract  to  do 
the  carpentry  work  on  a  house  that  was  being  built  for  Pink- 
ney. He  failed  to  make  cornices  and  to  put  centerpieces  in 
some  of  the  rooms  according  to  the  agreement;  and  the 
material  for  deadening  the  floors  did  not  have  hair  in  it,  as 
had  been  stipulated.    The  court  said  that  the  variations  were 

84 


DISCHARGE  OF  CONTRACTS  85 

not  intentional  or  material,  and  that  the  contract  had  been 
substantially  performed.* 

At  law,  time  is  of  the  essence  of  a  contract;  that  is, 
performance  must  be  within  the  time  specified,  or  the  party 
guilty  of  delay  will  be  liable  for  damages  for  non-performance. 
If,  however,  the  injured  party  accepts  performance  after  it 
is  due,  he  must  pay  the  fair  value  of  what  is  done,  though 
he  is  allowed  to  deduct  damages  for  the  delay. 

In  equity,  time  is  not  of  the  essence  of  the  contract  unless 
it  has  been  expressly  agreed  that  it. shall  be.  That  Is,  a  court 
of  equity  will  often  enforce  the  contract  in  favor  of  the  party 
who  has  delayed,  unless  in  fact  or  by  express  agreement  failure 
to  perform  on  time  amounts  to  failure  to  perform  at  all. 

Where  the  parties  agree  that  the  contract  must  be  per- 
formed to  the  satisfaction  of  one  of  them,  nothing  which 
does  not  satisfy  him  will  be  performance.  At  the  same  time, 
he  must  be  honest  about  his  dissatisfaction  and  not  pretend 
to  be  dissatisfied  when  he  is  not  really  so.  Sometimes  there 
is  an  agreement  that  the  judgment  of  a  third  person  shall  be 
the  test  as  to  whether  the  contract  is  performed  or  not.  In 
such  case,  the  contracting  parties  must  abide  by  his  judgment, 
unless  he  is  mistaken  or  fraud  is  shown. 

Notes: 

1.  Performance  must  be  substantially  in  accordance 

with  the  terms  of  the'  contract. 

2.  Where  time  is  material  to  the  contract,  the  per- 

formance must  be  within  the  time  set. 

3.  Where  the  parties  agree  that  the  performance  must 

be  to  the  satisfaction  of  one  of  them,  or  to  the 
satisfaction  of  a  third  party,  the  honest  judgment 
of  that  party  is  the  test  of  whether  or  not  the 
contract  has  been  performed. 

»8i  N.  Y.  an. 


86  CONTRACTS 

§  67.     Discharge  by  Agreement 

An  agreement  between  the  parties  to  rescind  a  contract, 
or  a  later  agreement  between  the  same  parties  with  regard 
to  the  same  subject  matter,  the  provisions  of  which  later  agree- 
ment are  inconsistent  with  the  contract,  will  discharge  the 
original  contract. 

The  agreement  to  rescind  the  contract  must,  like  all  other 
agreements,  conform  to  all  the  rules  governing  contracts.  The 
release  of  one  party  from  his  obligations  is  the  consideration 
for  the  release  of  the  other  from  his.  But,  where  one  party 
has  performed  his  part  of  the  contract,  there  must  be  some 
new  consideration  to  him  for  releasing  the  other,  or  the  agree- 
ment to  rescind  will  not  be  enforceable. 

There  is  only  one  case  in  which  the  parties  may  not  agree 
to  cancel  a  contract,  and  that  is  when  it  was  made  for  the 
benefit  of  a  third  person  and  the  third  person  has  notified 
them  that  he  accepts  it.  At  any  time  before  he  accepts  they 
may  declare  the  contract  void.  For  instance,  a  farmer  might 
come  into  town  and  tell  a  storekeeper  to  send  away  and  get 
a  suit  of  overalls  for  his  hired  man  and  he  would  pay  for 
them.  He  informs  the  hired  man  of  what  he  has  done  and 
the  hired  man  tells  the  storekeeper  that  he  will  call  for  the 
overalls  when  they  are  expected.  At  any  time  before  the  hired 
man  told  either  the  farmer  or  the  storekeeper  that  he  would 
take  the  overalls,  they  might  have  cancelled  the  contract,  but 
not  afterwards.  In  all  the  states,  with  the  exception  of  Massa- 
chusetts, Michigan,  New  Hampshire  and  Vermont,  a  third 
person  may  maintain  an  action  for  the  breach  of  a  contract 
for  his  benefit. 

H  two  parties  to  an  agreement  make  a  new  agreement 
about  the  same  subject  matter  which  is  inconsistent  with  the 
old  agreement  in  any  way,  the  old  agreement  will  be  dis- 
charged to  that  extent.  For  instance,  in  an  agreement  of 
novation  (see  §  65),  by  accepting  the  substituted  party,  the 


DISCHARGE  OF  CONTRACTS  87 

Other  party  discharges  the  party  making  the  novation  from 
his  obligations  under  the  contract. 

If  the  parties  put  an  oral  agreement  into  writing  or  instead 
of  a  written  agreement  make  a  new  contract  under  seal, 
the  old  contract  is  discharged  and  they  are  bound  only  by 
the  new  agreement. 

Notes: 

t.  The  parties  may  agree  together  to  rescind  a  con- 
tract, except  that  where  it  was  made  for  the  benefit 
of  a  third  party,  they  may  not  rescind  it  after  he 
has  given  notice  of  acceptance. 

2.  A  later  agreement,  between  the  same  parties  and 

with  regard  to  the  same  subject  matter,  the  terms 
of  which  are  wholly  or  partly  inconsistent  with  a 
prior  agreement,  revokes  that  agreement  so  far 
as  it  is  inconsistent  with  it. 

3.  An  oral  agreement  is  superseded  and  discharged  by 

a  later  written  agreement,  and  a  contract  in  writ- 
ing but  not  sealed  is  superseded  by  a  sealed  in- 
strument. 

§  68.     Discharge  by  Various  Other  Causes 

Operation  of  Law.  A  contract  may  be  discharged  by  the 
operation  of  law.  When  a  contract  is  discharged  by  the 
making  of  a  new  written  or  sealed  contract,  as  has  already 
been  explained  (§  67),  it  is  discharged  by  the  operation  of 
the  law  which  declares  that  a  written  instrument  is  of  greater 
value  than  an  oral  agreement,  a  sealed  instrument  than  a 
written  contract.  When  a  person  goes  into  bankruptcy,  the 
law  discharges  all  of  his  contracts  with  a  few  exceptions. 

Impossibility  of  Performance.  There  are  some  cases  in 
which  impossibility  of  performance  discharges  a  contract.  If 
it  were  for  some  particular  article  which  could  not  be  replaced 
and  the  article  were  destroyed,  or  if  it  were  a  contract  for 


88  CONTRACTS 

personal  services  and  the  person  to  render  the  services  became 
ill  or  died,  the  contract  would  be  considered  discharged,  and 
there  would  be  no  liability  for  damages.  The  parties  are 
considered  to  have  realized  that  if  such  a  thing  were  to  happen 
the  contract  could  not  be  performed,  and  to  have  made  the 
contract  on  the  understanding  that  it  would  be  carried  out 
only  in  case  the  article  were  in  existence  or  the  person  were 
able  to  perform  at  the  time.  If  the  one  party  to  a  contract 
by  his  acts  made  performance  impossible,  it  would  discharge 
the  other  party  from  all  obligation.  Contracts  for  the  pay- 
ment of  money  are  not  discharged  by  the  death  of  either  party, 
but  contracts  involving  personal  skill,  trust  or  confidence  be- 
tween the  parties  are  discharged  by  the  death  of  one  of  the 
parties.  This  does  not,  however,  apply  to  contracts  which 
can  be  carried  out  by  the  executors  of  the  deceased,  such  as 
to  have  a  house  built  or  painted. 

Act  of  God.  Where  the  performance  becomes  impossible 
by  what  is  known  as  an  "act  of  God,"  that  is,  a  tornado,  a 
hurricane,  a  flood,  a  conflagration,  or  some  other  accident 
or  disaster  amounting  to  a  public  calamity,  the  contract  is 
discharged.  Ordinarily  a  person  takes  the  risk  of  the  contract 
being  impossible  to  perform  if  he  does  not  make  some  provi- 
sion for  it  in  the  agreement,  and  impossibility  of  performance 
is  no  excuse. 

In  the  case  mentioned  in  §  41,  where  the  subject  matter 
was  destroyed  at  the  time  the  contract  was  made,  if  one  of 
the  parties  knew  of  it,  he  will  be  held  liable  for  a  breach  of 
the  contract,  notwithstanding  that  it  is  impossible  for  him  to 
perform  it.  In  the  case  of  a  contract  where  one  of  the  parties 
promises  to  do  one  of  two  things,  if  one  of  those  things  was 
impossible  at  the  time  the  contract  was  made,  he  must  perform 
the  other. 

In  Case  of  War.  When  two  countries  go  to  war,  all 
possibility  of  friendly  relationship  between  them  ceases.    All 


DISCHARGE  OF  CONTRACTS  89 

contracts  between  their  citizens  on  which  nothing  has  yet  been 
done  are  discharged.  If  anything  has  been  done  by  either 
party  under  a  contract,  and  it  is  possible  to  do  so  without 
injustice  to  either  party,  the  contract  will  merely  be  suspended 
until  the  war  is  over,  when  it  must  be  carried  out  fully  in 
accordance  with  its  terms. 

Effect  of  Strikes.  A  contract  may  provide  in  itself  that 
it  is  to  be  discharged  on  the  happening  of  certain  conditions. 
It  is  very  common  to  provide  against  strikes,  etc.,  in  this  way. 
The  provision,  however,  must  be  in  the  body  of  the  contract 
to  be  good.  A  notice  at  the  top  of  the  firm  letterhead  that 
all  sales  were  to  be  subject  to  strikes  or  accidents  would  not 
form  part  of  a  contract  written  under  such  letterhead. 

As  a  general  rule,  printed  conditions  on  a  letterhead  are 
not  binding  on  the  party  receiving  the  letter.  If  any  matter 
is  important  it  should  be  written  in  the  body  of  the  letter. 

Lapse  of  Time.  Any  contract  is  supposed  to  be  performed 
within  a  reasonable  time.  Even  if  no  time  for  performance 
be  given  in  the  contract,  it  will  nevertheless  be  discharged  if 
a  long  period  of  time  goes  by  without  anything  being  done 
on  it  by  either  party. 

Offer  to  Perform.  If  due  performance  is  offered  by  one 
party  and  is  not  accepted  by  the  other,  the  first  party  is  dis- 
charged. 

Notes: 

Contracts  may  be  discharged: 

1.  By  the  operation  of  conditions  agreed  to  by  the 

parties. 

2.  By  merger  or  alteration  of  a  written  instrument, 

or  by  the  discharge  of  the  party  in  bankruptcy. 

3.  By  lapse  of  time  if  delay  is  unreasonable. 

4.  By  an  offer  to  perform,  if  it  was  refused  by  the 

other  party. 


go 


CONTRACTS 

By  impossibility  of  performance,  where  the  im- 
possibility is  caused  by  the  act  of  the  other 
party;  by  the  operation  of  law;  by  a  declara- 
tion of  war;  or  by  the  destruction  of  the  subject 
matter  where  the  contract  concerned  a  par- 
ticular article  or  was  for  personal  services ;  but 
not  otherwise. 

In  making  contracts  to  handle  orders,  to  carry 
on  construction  work,  etc.,  involving  large 
amounts,  where  there  is  a  possibility  of  strikes 
and  various  labor  disputes  preventing  the  finish- 
ing of  the  work  at  all,  or  at  least  within  the 
time  limited  by  the  contract,  parties  should 
always  provide  against  such  delays.  It  is 
usually  safe  to  have  a  fire  clause,  and  to  pro- 
vide against  destruction  by  floods,  tornadoes, 
etc. 


Review  Questions 

1.  What  is  meant  by  the  discharge  of  a  contract? 

2.  What  is  meant  by  substantial  performance? 

3.  What  is  the  rule  as  to  time  of  performance,  at  law?    In  equity? 

4.  Is  it  safe  to  agree  to  make  performance  to  the  satisfaction  of 

an  interested  party? 

5.  What  is  meant  by  "discharge  by  agreement"? 

6.  If  one  party  had  performed  his  part  of  the  contract,  could  the 

parties  agree  to   rescind?     What  element  would  be  needed 
legally  to  rescind  a  contract? 

7.  What  effect  does  the  interest  of  a  third  party  have? 

8.  What  is  the  effect  of  making  a  new  contract  of  greater  dignity 

than  the  old  contract? 

9.  What  is  the  effect  of  bankruptcy  on  pending  contracts? 

10.  What  is  the  effect  of  impossibility  on  a  contract?  What  is  the 
situation  when  a  contract  becomes  impossible  but  the  contract 
is  not  discharged? 


DISCHARGE  OF  CONTRACTS  9I 

11.  In  what  cases  does  impossibility  discharge  the  contracts?    What 

kinds  of  contracts  are  discharged  by  the  death  of  the  party 
to  perform? 

12.  What  is  the  effect  of  specifying  certain  causes  as  operating  to 

discharge  the  contract? 

13.  A  father  conveyed  land  to  his  son  on  his  son's  covenanting  to 

pay  an  annuity  to  his  mother  on  her  widowhood.  May  the 
mother  maintain  an  action,  not  being  a  party  to  the  covenant  ? 

14.  B  orally  requested  A  to  do  certain  carpentry  work  around  his 

house  in  the  nature  of  repairs.  B  died.  A  subsequently 
performed  the  work  and  brought  suit  against  the  administra- 
tors for  the  price.  Can  he  recover?  If  so,  why  so;  if  not, 
why  not? 

15.  Does  outbreak  of  war  nullify  contracts  if  it  simply  changes 


prices 


16.  What  is  the  effect  of  lapse  of  time  and  non-performance? 

17.  If  one  party  offers  to  perform  and  the  other  party  does  not 

accept,  what  is  the  effect  as  to  each  party? 


CHAPTER  XI 

ENFORCEMENT  OF  CONTRACTS 

§  6g.    Breach  of  Contract 

The  obligation  of  a  contract  is  an  obligation  created  and 
determined  by  the  will  of  the  parties.  Herein  is  the  charac- 
teristic difference  of  contract  from  all  other  branches  of  law. 
The  business  of  the  law,  therefore,  is  to  give  effect  so  far  as 
possible  to  the  intention  of  the  parties,  and  all  the  rules  of 
interpreting  contracts  go  back  to  this  fundamental  principle 
and  are  controlled  by  it.^ 

A  contract  may  be  broken  by  either  party  in  one  of  several 
ways,  such  as: 

1.  Failing  to  perform  the  contract. 

2.  Refusing  to  perform  the  contract. 

3.  Making  it  impossible  for  himself  to  perform  the 

contract,  or  denying  that  there  is  such  a  contract. 

Failure  to  Perform.  If  a  party  breaks  a  contract  by  fail- 
ing to  perform  it,  the  other  party  must  have  done  all  that  can 
be  required  from  him  under  the  contract  before  he  is  entitled 
to  bring  suit.  If  his  part  of  the  contract  was  to  pay  after  the 
other  party  had  performed  it,  he  need  not  pay  until  such 
performance. 

If  a  party  was  to  perform  work  or  to  deliver  goods  for 
which  the  other  party  was  to  pay,  he  must  be  able  to  show 
that  he  has  either  performed  or  offered  to  perform  the  work, 
or  that  he  has  delivered  or  offered  to  deliver  the  goods,  before 
he  has  any  right  to  claim  damages.     A  party  must  remain 

»Encyc.  Brit.,  nth  Ed.,  Vol.  VII,  page  38. 

92 


ENFORCEMENT  OF  CONTRACTS  93 

ready  and  willing  and  in  a  position  to  perform  what  he  agreed 
during  the  entire  time  of  the  contract;  it  is  not  enough  once 
to  have  made  the  offer. 

It  is  often  hard  to  determine  just  when  a  contract  has 
been  broken  by  failure  to  perform.  Unless  the  time  within 
which  it  was  to  be  performed  was  an  important  part  of  the 
value  of  the  contract,  the  courts  usually  give  parties  what 
they  consider  a  reasonable  time  in  which  to  complete  it, 
whether  the  contract  sets  a  definite  time  for  its  completion 
or  not. 

A  Reasonable  Time.  The  difficulty  is  to  know  what  the 
court  will  consider  a  reasonable  time.  The  parties  may,  how- 
ever, have  this  determined  beforehand  by  stating  in  the  con- 
tract that  "time  is  of  the  essence  (that  is,  an  essential  part) 
of  this  contract,"  in  which  case  the  court  will  enforce  it 
within  the  time  specified.  Or,  if  this  has  not  been  done,  the 
party  for  whom  the  services  were  to  be  performed  or  to  whom 
the  goods  were  to  be  delivered,  etc.,  may  demand  that  the 
other  party  fulfil  his  part  of  the  contract  within  a  certain 
time  or  he  will  consider  it  broken.  If  he  has  really  given  the 
other  party  a  reasonable  time,  he  will  have  a  right  to  bring 
action  if  the  services  agreed  upon  have  not  been  performed 
within  that  time. 

A  party  is  always  allowed  until  the  last  minute  of  the 
time  set  to  perform,  and  the  day  on  which  the  contract  was 
dated  or  the  demand  made  will  not  be  counted  as  a  part  of 
that  time;  for  instance,  if  the  contract  was  dated  or  the 
demand  made  on  July  i,  giving  him  30  days  in  which  to 
perform  the  contract,  the  time  will  not  be  considered  to  have 
expired  until  midnight  of  July  31. 

Refusal  to  Perform.  If  a  party  refuses  to  perform  the 
conditions  of  the  contract  when  the  time  comes  for  per- 
formance, he  also  relieves  the  other  party  from  further  obliga- 
tion and  gives  him  an  immediate  right  to  sue  for  damages. 


94 


CONTRACTS 


If  a  party  refuses  to  carry  out  a  contract  before  the  time 
for  its  performance  has  arrived,  in  some  states  the  other 
party  has  a  right  to  regard  this  as  final,  but  in  the  other  states 
he  must  wait  until  the  time  for  performance  has  passed  before 
he  is  entitled  to  bring  suit. 

When  a  party  notifies  the  other  party  that  he  does  not 
intend  to  perform  his  part  of  the  agreement  and  tells  him 
to  stop  work  on  it,  the  latter,  if  he  accepts  the  notice,  should 
stop  work  immediately.  He  may,  if  he  prefers,  however, 
ignore  the  notice  and  treat  the  contract  as  still  existing  by 
continuing  to  perform  his  part,  though  he  may  not  collect  for 
work  performed  after  notice. 

Denial  of  Contract.  If  a  party  denies  that  there  is  a  con- 
tract, or  makes  it  impossible  for  himself  to  perform  it  by 
disposing  of  its  subject  matter  in  some  way,  the  other  party 
is  immediately  relieved  from  all  obligations  and  has  the  right 
to  sue  at  once  for  the  damages  he  has  sustained. 

Notes: 

.    I.     Refusal  to  perform  a  contract  is  a  breach  of  the 
contract. 

2.  Making  it  impossible  for  one's  self  to  perform  a 

contract  is  a  breach  of  the  contract. 

3.  In  either  of  the  cases  cited  above,  the  other  party 

may  abandon  the  contract  and  sue  at  once  for 
damages. 

4.  Failure  to  perform  one  part  of  a  divisible  contract 

is  not  a  breach  of  the  entire  contract,  and  does 
not  excuse  the  other  party  from  performance  of 
the  rest. 

5.  In  case  of  a  breach  by  failure  to  perform,  the  other 

party  must  show  that  he  has  performed  his  part, 
or  was  ready  and  willing  to  do  so,  before  he  can 
claim  damages. 


ENFORCEMENT  OF  CONTRACTS  95 

6.  Where  a  contract  has  been  partly  performed  by  one 

party,  the  other  party  must  carry  out  his  part  of 
it,  unless  the  first  party  has  refused  to  perform 
further,  or  the  circumstances  are  such  that  he 
would  not  be  able  to  perform  the  rest  of-  it. 

7.  The  party  who  broke  the  contract  must  be  paid  the 

reasonable  worth  of  what  he  has  done  on  it,  unless 
his  breach  of  it  was  wilful  or  the  contract  pro- 
vided that  he  should  have  nothing  unless  he  per- 
formed the  whole. 

§  70.     Remedies  for  Breach  of  Contract 

The  party  who  is  injured  by  a  broken  contract  may  either 
(i)  sue  for  damages,  or  (2)  he  may  abandon  the  contract 
and  sue  for  the  value  of  his  services  or  of  the  goods  furnished. 

The  moment  a  contract  is  actually  broken  the  other  party 
has  a  right  of  action  for  damages,  but  there  must  be  an  actual 
breach.  People  are  inclined  to  rush  into  court  when  they 
think  that  their  contract  rights  are  disregarded,  without  stop- 
ping to  make  sure  that  there  has  actually  been  a  breach. 

When  parties  to  a  contract  agree  on  the  amount  that  shall 
be  paid  in  case  of  breach  or  default,  such  amount  is  called 
liquidated  damages.  The  plaintiff  in  an  action  for  breach 
of  contract  can  sue  only  for  profits  proved  to  have  been  lost, 
and  not  for  estimated  profits  lost.  The  jury  would  judge  the 
amount  of  his  actual  loss  from  the  evidence  submitted. 

Action  for  Breach  of  Contract.  If  an  action  for  breach 
of  contract  is  to  be  brought  at  all,  it  is  best  to  do  it  as  soon 
as  possible  after  the  contract  has  been  broken,  as  the  court 
may  consider  that  a  person  has  voluntarily  surrendered  his 
right  if  he  waits  too  long,  or  possibly  something  may  happen 
that  will  excuse  the  other  party  from  performance.  But  there 
is  one  class  of  contracts  in  regard  to  which  a  great  deal  of 
care  must  be  taken  when  bringing  suit;  these  are  contracts 


96  ♦  CONTRACTS 

where  there  are  several  parts  entirely  separate  from  and  hav- 
ing no  connection  with  each  other.  If  it  is  perfectly  clear 
that  they  are  separate,  a  party  would  have  a  right  to  sue  for 
a  breach  of  one  of  the  parts  at  once  without  affecting  his 
rights  under  the  rest  of  the  contract.  For  instance,  a  breach 
of  warranty  in  a  contract  would  give  a  right  to  damages  for 
that  warranty  without  in  any  way  affecting  the  rest  of  the 
contract. 

Where  one  of  the  parties  is  prevented  from  performing 
a  contract  for  personal  services  by  sickness  or  death,  he  or 
his  estate  may  recover  the  value  of  what  he  has  already 
done ;  and  where  a  contract  has  been  partly  performed  by  one 
of  the  parties  and  the  other  party  has  received  any  benefit 
from  what  has  been  done,  he  must  pay  for  it  unless  the  breach 
was  wilful  and  intentional. 

When  Specific  Performance  Can  Be  Had.  There  are 
some  exceptional  cases  in  which  an  action  for  damages  would 
not  be  an  adequate  remedy  for  the  injured  party,  and  in  such 
a  case  a  court  of  equity  will  compel  the  first  party  to  perform 
the  contract. 

In  Marsh  v.  Blackman,  Mrs.  Marsh  agreed  with  the  two, 
sons  of  Judge  Blackman  to  take  care  of  their  father  until 
his  death  for  $2  a  week.  They  later  notified  her  that  they 
refused  to  perform  the  contract.  The  court  said  that  it  would 
be  impossible  to  compute  the  damages  with  any  certainty  as 
their  amount  would  depend  on  the  length  of  Judge  Black- 
man's  life,  and  that  it  would  therefore  compel  the  two  sons 
to  carry  out  their  agreement.^  (See  §  74,  "Specific  Per- 
formance.") 

Instalment  Contracts.  But  in  contracts,  for  instance, 
which  are  to  be  performed  by  instalments,  such  as  a  contract 
to  deliver  1,000  barrels  of  oil  at  the  rate  of  100  barrels  a 


*  50  Barb.  (N.  Y.)  329.     (This  is  an  old  case,  before  the  high  cost  of  living  became 
noticeable.) 


ENFORCEMENT  OF  CONTRACTS  97 

month  until  the  contract  is  completed,  it  is  not  perfectly  clear 
whether  a  failure  to  deliver  one  lot  of  100  barrels  would  be 
a  breach  of  the  whole  contract  or  not.  The  courts  in  the 
various  states  hold  different  views  on  this  question.  If  a 
party  brought  an  action  for  damages  at  once,  he  might  find 
himself  cut  off  from  any  further  damages  in  case  of  the  other 
party's  failing  to  deliver  the  rest  of  the  oil;  or  if  he  treated 
the  contract  as  broken  he  might  find  himself  the  one  guilty 
of  breaking  it.  The  only  safe  thing  to  do  in  these  cases  is 
to  consult  a  local  lawyer. 

When  a  contract  is  to  be  performed  to  the  satisfaction 
of  a  party  thereto  or  of  a  third  person,  such  as  an  architect 
or  an  engineer,  the  work  must  satisfy  the  person  designated, 
but,  as  a  general  rule,  the  court  will  hold  him  to  what  it 
considers  reasonable. 

Breach  by  Failure  to  Perform.  A  breach  by  failure  to 
perform  does  not  usually  take  place  until  the  time  for  per- 
formance has  passed.  However,  in  contracts  where  goods  are 
to  be  paid  for  in  instalments,  or  rent  is  to  be  paid  by  the 
month,  if  the  contract  is  an  entire  and  not  a  divisible  con- 
tract, failure  to  deliver  one  instalment  or  to  pay  one  month's 
rent  will  be  a  breach  of  the  entire  contract.  Where  the  con- 
tract is  a  divisible  one,  failure  as  to  a  separable  portion  is  a 
breach  of  that  part  of  the  contract,  and  the  party  may  sue 
on  that  while  the  rest  of  the  contract  is  being  performed. 

It  must  be  borne  in  mind  that  if  the  breach  was  of  one 
provision  of  a  divisible  contract,  the  party  suing  must  show 
that  he  performed  whatever  was  due  from  him  under  that 
provision  before  he  can  claim  damages  for  its  violation. 

A  divisible  contract  is  one  in  which  the  obligation  consists 
of  independent  parts,  not  necessarily  united,  as,  if  one  agreed 
to  deliver  ICX)  bushels  of  corn  in  March  and  100  in  April, 
or  to  deliver  at  the  same  time  50  bushels  of  onions  and  25 
bushels  of  potatoes.     An  agreement  to  do  several  things  at 


9^  CONTRACTS 

several  times  is  divisible,  unless  the  consideration  to  be  paid 
is  entire. 

Breach  by  Refusal  or  Denial.  Where  the  party  positively 
refuses  to  perform,  or  denies  the  existence  of  the  contract, 
an  action  may  be  brought  at  once  for  a  breach  of  the  contract. 
The  other  party  does  not  need  to  do  anything  further  on  the 
contract  himself,  and,  if  he  does  do  anything  further,  cannot 
recover  anything  for  the  extra  work,  for  the  plaintiff  has  no 
right  to  aggravate  the  damages.  There  must  be,  however,  a 
positive  refusal  to  perform  under  any  conditions. 

Time  to  Bring  Suit.  The  party  has  always  a  right  to 
ignore  an  intermediate  breach  and  to  wait  until  the  time  for 
final  performance  arrives  before  bringing  suit;  but  if  he  does 
this  he  takes  the  risk  that  some  other  happening  may  dis- 
charge the  contract  before  that  time.  If,  on  the  other  hand, 
he  waits  until  the  time  for  performance,  he  is  entitled  to  all 
the  damages  which  he  has  sustained  up  to  that  time.  In  any 
case  professional  advice  should  be  secured  and  followed. 

Notes: 

1.  Where  there  is  a  contract  for  the  delivery  of  goods 

or  the  performance  of  work  by  instalments,  and 
there  is  a  failure  to  perform  one  of  the  parts  of 
the  contract  as  agreed  upon,  a  party  ought  to 
consult  a  lawyer  as  to  his  rights  before  making 
any  statements  to  the  other  party  about  it. 

2.  It   is   always   a   matter    for   serious   consideration 

whether  a  breach  of  contract  justifies  a  remedy 
so  costly  and  uncertain  as  a  suit  at  law.  (See 
Chapter  IV,  "Law  and  Equity.") 

§  71.    Law  Governing  Remedy 

It  has  already  been  explained  (§  40)  that  a  contract  is 
interpreted  in  reference  to  the  law  of  the  place  where  it  was 
made,  unless  the  parties  state  that  they  intend  it  to  be  governed 


ENFORCEMENT  OF  CONTRACTS  99 

by  some  other  law;  but  if  they  specify  some  other  law  merely 
to  evade  the  law  of  the  place  where  the  contract  was  made, 
the  local  law  will  govern  despite  their  provision. 

In  bringing  an  action  on  a  contract,  the  method  of  bring- 
ing it,  the  right  to  bring  it,  and  the  defenses  that  may  be 
made  to  it,  are  all  governed  by  the  law  of  the  place  where  it 
is  brought,  and  defenses  which  may  be  made  in  some  states 
cannot  be  used  in  others.  The  Statute  of  Limitations  (^72) 
differs  in  the  different  states,  so  that  a  contract  on  which  an 
action  may  not  be  brought  in  one  state  may  be  sued  on  in 
another  if  the  party  to  be  sued  is  subject  to  its  jurisdiction. 

Note: 

I.     The  place  to  bring  suit  is  a  matter  regarding  which 
it  is  necessary  to  seek  legal  advice. 

§  72.     Statute  of  Limitations 

The  Statute  of  Limitations  is  the  law  that  specifies  the 
time  limit  within  which  an  action  may  be  brought.  For  the 
sake  of  peace  and  in  order  to  put  some  limit  to  the  time  in 
which  rights  of  property,  etc.,  can  be  upset  by  lawsuits,  laws 
have  been  enacted  in  every  state  providing  that  after  a  certain 
length  of  time  specified  in  the  law  actions  may  not  be  brought 
in  the  courts.  These  laws  apply  to  all  the  various  forms  of 
actions,  including  those  on  contracts.  If  the  contract  is  under 
seal,  the  law  usually  gives  a  longer  time  in  which  to  bring 
action  on  it. 

The  Statute  of  Limitations  begins  to  run,  not  from  the 
date  when  the  obligation  was  made,  but  from  the  date  when 
payment  is  due.  In  cases  in  which  demand  is  necessary  before 
a  party  is  liable,  the  statute  begins  to  run  from  the  time  the 
demand  was  actually  made.  In  the  case  of  a  checking  account 
in  a  bank,  the  time  on  each  check  does  not  begin  until  demand 
is  actually  made  or  some  act  of  the  banker  has  dispensed  with 


lOO  CONTRACTS 

it.  If  each  of  the  parties  has  an  account  with  the  other,  and 
if  they  clearly  intended  to  balance  these  accounts  against  each 
other,  the  statute  begins  to  run  against  the  balance  at  the  date 
of  the  last  entry. 

A  written  promise  to  pay  the  debt  is  sufficient  to  renew 
the  contract  and  to  furnish  a  new  date  from  which  the  statute 
runs.  A  part  payment  of  principal  or  interest  of  the  sum 
due  will  likewise  renew  the  contract. 

Sometimes  the  Statute  of  Limitations  provides  that,  after 
the  time  specified,  the  party  shall  have  no  further  right  of 
action.  This  means  that  the  cause  of  action  is  dead  altogether, 
and  thus  cannot  be  enforced  anywhere.  If  the  law  of  the 
state  where  the  contract  was  made  has  such  a  statute,  the 
contract  cannot  be  sued  on  anywhere  after  that  time  has 
passed,  because  the  statute  is  said  to  "go  to  the  right  of  suit" ; 
that  is,  it  ceases  to  exist. 

Usually,  however,  the  Statute  of  Limitations  merely  "goes 
to  the  remedy";  that  is,  the  cause  of  action  remains,  but  the 
law  does  not  allow  the  courts  to  enforce  it  after  a  certain 
time,  and,  if  suit  is  brought  after  that  time,  the  other  party 
may  plead  that  the  law  has  barred  the  right  of  remedy.  If, 
however,  the  other  party  does  not  plead  the  Statute  of  Limita- 
tions in  such  a  case,  the  action  may  be  brought,  because  it 
was  passed  only  to  protect  him  from  the  bringing  of  a  suit 
at  a  time  when  he  might  not  be  able  to  get  the  evidence  for 
his  side,  and  if  he  is  willing  to  fight  the  case  on  its  merits 
he  can  do  so. 

Where  the  Statute  of  Limitations  in  the  state  where  the 
contract  was  made  affects  only  the  remedy,  it  does  not  affect 
the  contract;  and  the  question  as  to  whether  the  action  may 
or  may  not  be  brought  depends  on  the  law  of  the  state  in 
which  it  is  desired  to  sue.  Therefore,  a  contract  on  which  an 
action  could  not  be  brought  in  the  state  where  it  was  made 
might  be  sued  on  and  enforced  in  some  other  state  where 


ENFORCEMENT  OF  CONTRACTS         loi 

a  longer  time  is  allowed  by  the  Statute  of  Limitations  for 
the  bringing  of  the  action,  provided  the  other  party  lives  there. 
Note: 

I.  It  is  right  and  just  that  if  a  party  sleeps  on  his 
rights  he  should  lose  his  cause  of  action,  and 
that  men  should  not  have  to  fight  stale  claims. 


Review  Questions 

1.  To  take  legal  action  against  a  person  who  has  failed  to  perform 

his  part  of  a  contract,  what  must  the  other  party  show? 

2.  What  is  the  rule  as  to  time?     What  is  "reasonable  time"? 

3.  If  a  tailor  was  to  have  a  suit  finished  on  the  20th  of  the  month 

and  it  was  not  ready  till  the  25th,  could  he  hold  his  customer? 
How  would  it  be  if  the  customer  had  told  him  that  he  was  to 
sail  for  Europe  on  the  21st? 

4.  If  a  person  had  agreed  to  sell  60  barrels  of  flour  and  10  barrels 

of  apples  and  only  delivered  the  apples,  could  he  collect  the 
agreed  price  for  the  apples?  Why?  Suppose  that  the  price 
of  flour  and  apples  had  advanced  at  the  time  of  delivery, 
how  would  that  affect  the  situation  ? 

5.  If  a  person  is  working  by  the  month  and  leaves  ten  days  before 

the  end  of  his  period  because  he  can  get  a  better  job,  can 
he  collect  for  the  time  he  worked? 

6.  How  soon  is  it  best  to  bring  suit  for  a  breach  of  contract? 

What  is  to  be  considered  before  bringing  suit? 

7.  What  law   governs  the   interpretation  of  a  contract?     Where 

may  suit  be  brought?     Why? 

8.  What  is  the  Statute  of  Limitations  and  on  what  policy  is  k 

founded?     Explain  fully. 

9.  In  the  state  in  which  you  live:  ^ 

How  soon  must  a  crime  be  prosecuted? 
How  soon  must  action  be  brought  for  a  personal  injury? 
How  soon  must  action  be  brought  on  an  oral  contract? 
How  soon  must  action  be  brought  on  an  open  account? 
How  soon  must  action  be  brought  on  a  written  contract? 


•  The  data  required  will  be  found  in  the  Revised  Statutes  of  the  State. 


J02  CONTRACTS 

How  soon  must  action  be  brought  to  recover  land? 
How  soon  must  action  be  brought  on  a  sealed  contract? 

10.  State  two  ways  of  renewing  a  debt  so  that  the  Statute  of  Limita- 

tions will  recommence  to  run. 

11.  Give  three  ways  that  will   prevent  the  statute   from   running 

against  an  ordinary  debt. 

12.  Define  liquidated  damages  in  relation  to  a  building  contract. 

13.  If,  by  admitted  breach  of  contract  of  A,  B's  business  is  stopped 

for  a  period,  can  B  recover  damages  for  profits  estimated  or 
only  for  profits  proved  to  have  been  lost? 


CHAPTER  XII 

ACTIONS  ON  CONTRACTS— GENERAL  RULES 

§  73.     Introductory 

Besides  the  particular  provisions  of  the  law  of  the  state 
where  the  action  is  brought,  there  are  certain  general  rules 
which  apply  to  actions  anywhere. 

Assigned  Contracts.  Where  a  contract,  or  a  cause  of 
action  arising  out  of  a  contract,  has  been  assigned,  the  party 
to  whom  it  has  been  assigned  must  bring  the  action  in  the 
name  of  the  party  to  the  contract  from  whom  he  received 
it,  unless  there  is  a  law  allowing  him  to  sue  in  his  own  name. 
This  is  the  rule  of  the  common  law,  but  now  in  most  states 
the  party  who  has  the  actual  interest  in  the  contract  is  allowed 
to  sue  in  his  own  name. 

Joint  Contracts.  Where  there  is  a  joint  contract,  all  the 
parties  to  it  must  be  brought  into  the  action;  that  is,  if  other 
parties  are  jointly  interested  with  the  party  suing,  he  must 
join  them  with  himself  as  plaintiffs.  If,  however,  they  refuse 
to  join  as  plaintiffs,  the  law  in  many  cases  provides  that  they 
may  be  joined  as  defendants,  in  which  case  the  party  so  join- 
ing them  must  explain  that  they  refused  to  be  joined  as  plain- 
tiffs and  mention  the  statute  by  which  he  is  allowed  to  join 
them  as  defendants. 

If  several  parties  are  jointly  obligated  to  the  plaintiff  by 
the  same  contract,  when  he  sues  he  must  include  them  all 
as  defendants.  If  any  of  the  parties  to  the  contract  are  left 
out  of  the  suit,  they  are  released  from  all  obligations  under 
it,  unless  they  agreed  in  the  contract  to  be  liable  individually 
for  the  whole  contract  apart  from  all  the  others. 

103 


I04 


CONTRACTS 


Assumption  of  Legality.  The  law  always  assumes  that  a 
contract  is  legal  and  proper ;  therefore  the  person  who  asserts 
that  it  was  illegal,  or  the  result  of  fraud,  undue  influence, 
duress,  etc.,  must  prove  the  fraud  or  other  allegation. 

Notes: 

1.  The  law  of  the  place  where  the  contract  is  made 

governs  its  interpretation  unless  the  contract  ex- 
plicitly specifies  otherwise. 

2.  The  law  of  the  place  where  suit  is  brought  governs 

the  right  to  bring  action  on  it,  and  the  defenses 
which  may  be  made. 

3.  Where  the  Statute  of  Limitations  of  the  place  where 

the  contract  was  made  takes  away  the  right  of 
action,  no  action  may  afterwards  be  brought  on 
the  contract  in  any  state. 

4.  In  suing  on  a  joint  contract,  all  the  parties  must  be 

joined,  either  as  plaintiffs  or  as  defendants. 

§  74.     Specific  Performance 

There  are  some  cases  where  damages  do  not  repay  the 
party  for  what  he  lost  on  the  contract,  as,  for  Instance,  if 
the  contract  was  to  buy  some  valuable  work  of  art  which  he 
could  not  duplicate  elsewhere.  In  contracts  for  the  delivery 
of  goods,  where  it  is  possible  for  the  party  to  go  out  and 
purchase  other  goods  of  the  same  nature,  his  loss  can  easily 
be  computed  and  covered  by  damages;  but  where  it  is  im- 
possible to  compute  the  damages,  or  where  the  property  pur- 
chased is  a  work  of  art,  an  heirloom,  or  something  else  which 
cannot  be  duplicated  or  easily  purchased  elsewhere,  so  that 
damages  do  not  compensate  him  for  his  loss,  the  court  will 
compel  the  other  party  to  perform  the  contract.  This  is 
known  as  "specific  performance,"  and  is  granted  by  what  is 
termed  a  court  of  equity. 


ACTIONS  ON  CONTRACTS GENERAL  RULES        105 

Land,  with  everything  relating  to  it,  is  always  regarded 
as  having  a  peculiar  value;  so  that  a  contract  for  the  sale 
of  land  may  always  be  specifically  enforced. 

In  cases  where  the  contract  is  for  personal  services,  or 
cannot  be  carried  out  because  the  other  party  has  disposed 
of  the  property  involved,  or  for  any  other  cause,  the  court 
will  refuse  to  make  a  useless  decree.  In  the  case  of  personal 
services,  it  is  not  considered  that  any  services  which  the  other 
party  might  perform  in  order  to  escape  imprisonment  would 
be  worth  much.  If,  however,  the  other  party  has  disposed 
of  the  property  or  otherwise  put  it  out  of  his  power  to  per- 
form the  contract  after  the  suit  in  equity  has  been  begun,  the 
court  of  equity,  contrary  to  its  usual  custom,  will  award 
damages. 

Requirements  of  Courts  of  Equity.  The  party  who  brings 
a  suit  in  equity  must  show  that  he  has  not  been  careless  or 
negligent  regarding  his  rights,  but  has  insisted  on  them  and 
promptly  taken  action  to  protect  them.  This  carelessness  and 
negligence  are  known  in  legal  parlance  as  "laches,"  and,  unless 
there  is  some  excuse  for  them,  will  prevent  the  delinquent 
party  from  recovering  in  a  suit. 

The  party  who  brings  such  a  suit  must  also  be  able  to 
show  that  he  has  been  in  all  respects  just  and  fair  himself, 
and  he  cannot  ask  the  court  to  enforce  any  contract  which  is 
in  the  slightest  degree  unfair  to  the  other  pa'rty.  He  must 
show,  too,  that  he  has  done  everything  in  his  power  to  fulfil 
the  contract  on  his  own  part,  and,  if  the  other  party  has  pre- 
vented him  from  performing  it,  he  must  show  the  court  that 
he  was  and  is  able  and  willing  to  do  all  that  was  required 
on  his  part. 

A  court  of  equity  will  not  enforce  an  illegal  contract,  or 
one  that  has  been  obtained  by  duress,  fraud,  or  undue  in- 
fluence. Nor  will  it  enforce  a  contract  that  is  unconscion- 
able, or  where  an  unfair  advantage  has  been  taken  of  another 


Io6  CONTRACTS 

party's  ignorance  or  inexperience.     (See  Chapter  IV,  "Law 
and  Equity.") 

Notes: 

1.  No  court  will  enforce  a  contract  which  is  illegal  or 

improper. 

2.  Specific  performance  is  granted  only  where  damages 

would  not  compensate  the  party  for  his  loss. 

3.  Courts  of  equity  will  see  justice  done  as  nearly  as 

possible,  and  therefore,  the  party  who  seeks  their 
aid  must  be  prepared  to  do  justice  himself. 

§  75.    Rules  of  Evidence 

Certain  rules  have  grown  up  with  regard  to  the  admission 
of  evidence  before  a  court.  Some  of  these  rules  have  been 
dictated  by  convenience,  in  order  not  to  take  up  the  time  of 
the  court  unnecessarily;  others  for  the  sake  of  being  fair 
to  both  parties.  Some  of  the  rules  of  evidence  particularly 
concern  contracts. 

An  oral  contract  must  be  shown  by  testimony.  The  testi- 
mony of  the  parties  themselves,  and  of  any  witnesses  who 
were  present  and  heard  the  transaction,  is  competent;  but 
anything  in  their  conversation  or  relations  which  has  no  bear- 
ing on  the  contract  will  be  excluded.  It  often  happens  that 
contracts  are  agreed  upon  between  the  two  parties,  and  each 
remembers  only  the  part  that  favors  himself,  and  in  such 
a  case  a  court  cannot  give  any  relief,  because  the  evidence 
balances.  Where  it  is  not  possible  to  prove  the  making  of 
the  contract  itself  satisfactorily,  evidence  that  the  party  in 
some  way  acknowledged  or  ratified  it,  or  that  he  has  partly 
performed  it,  may  be  introduced  to  show  that  there  was  such 
a  contract. 

Competent  evidence  is  that  which  is  admissible. 

Material  evidence  is  that  evidence  which  applies  directly  to 
the  point  at  issng, 


ACTIONS  ON  CONTRACTS — GENERAL  RULES        I07 

Relevant  evidence  is  evidence  relating  to  the  matter  in 
dispute.  "Whatever  naturally  and  logically  tends  to  establish 
a  fact  in  issue  is  relevant  and  that  which  does  not  answer 
requirements  is  not."  *  Irrelevant  evidence  lacks  close  connec- 
tion with  the  fact  to  be  proved :  is  collateral  to  the  issue. 

The  general  rule  that  hearsay  evidence  is  excluded,  is 
based  on  the  principle  that  a  witness  may  testify  under  oath 
as  to  what  he  himself  has  seen  or  heard,  but  that  there  is  no 
value  in  a*  man's  taking  oath  as  to  what  another,  not  under 
oath,  has  told  him. 

The  Burden  of  Proof.  The  burden  of  proof  is  always  on 
the  party  who  makes  an  assertion;  thus  many  cases  fail, 
not  because  the  party  is  in  the  wrong,  but  because  he  cannot 
prove  his  case.  Judges  and  juries  can  act  only  on  evidence 
brought  before  them,  and  if  a  case  is  good  but  there  is  no 
evidence  to  prove  it,  a  court  cannot  give  relief,  and  the  law 
should  not  be  blamed  for  it.  This  is  why  written  contracts 
are  so  important.     (See  §§  42,  43.) 

The  Parol  Evidence  Rule.  The  meaning  of  this  rule  is 
that  other  evidence  will  not  be  admitted  to  vary  the  terms 
of  a  written  contract,  because  the  contract  itself  is  the  best 
evidence  of  what  its  terms  are.  Oral  evidence  may  always 
be  introduced  to  support  the  contract.  Necessarily,  the  per- 
formance of  the  contract,  or  a  breach  of  it,  will  have  to  be 
shown  by  oral  testimony.  The  same  is  true  of  abandonment 
of  the  contract;  and  anything  which  would  show  adequate 
motive  may  be  introduced  as  tending  to  support  the  proof  of 
the  abandonment. 

There  are  exceptions  to  the  parol  evidence  rule.  Where 
the  contract  is  not  clear  in  itself,  it  becomes  necessary  to 
resort  to  parol  evidence  to  explain  it.  Any  other  paper  or 
matter  to  which  the  contract  refers  may  be  proved  in  con- 
nection with  it,  and,  if  such  paper  shows  on  its  face  that  the 


1  Jones  on  Evidence,  Vol.  I,  Sec.  135. 


io8  CONTRACTS 

transaction  outlined  was  not  complete,  the  whole  transaction 
may  be  proved.  Oral  evidence  may  always  be  introduced  to 
show  fraud,  duress,  undue  influence,  or  illegality  in  the  con- 
tract. The  rules  of  evidence  may  even  be  stretched  in  such  a 
case  to  allow  the  proof  of  other  transactions  not  directly  con- 
nected with  the  contract  under  consideration,  tending  to  prove 
a  fraudulent  contract. 

Admissions.  A  party  will  never  be  allowed  to  use  his 
own  statements  and  acts  unconnected  with  the  actiial  contract 
or  the  transactions  leading  up  to  it,  to  prove  that  there  was 
a  contract,  or  that  what  he  claims  as  to  its  terms  is  true,  but 
he,  however,  may  prove  anything  which  the  other  party  said 
against  his  own  interest,  and  must  also  show  any  other  state- 
ments made  in  connection  with  the  admission  which  might 
have  limited  its  effect. 

Where  a  party  employs  an  agent  to  deal  for  him,  any 
admission  against  the  employer's  interest  which  the  agent 
made  at  the  time  of,  or  during  the  transactions  leading  up 
to,  the  contract,  may  be  used  against  the  employer;  but  not 
admissions  which  the  agent  made  after  the  execution  of  the 
contract. 

Books  of  Account.  Books  of  account  regularly  and  fairly 
kept  as  books  of  original  entry  supported  by  oath  are  admitted 
as  prima  facie  evidence  of  the  entries  therein  contained.^ 

If  the  clerk  who  made  the  entries  is  dead  his  handwriting 
may  be  proved. 

The  rules  in  regard  to  admitting  books  of  account  as  evi- 
dence are  as  follows: 

1.  They  must  be  regularly  kept  in  due  course  of  busi- 

ness. 

2.  The  entries  must  be  made  by  the  party  or  an  author- 

ized clerk  at  or  about  the  time  of  the  transactions. 


*  Jones  on  Evidence,  Vol.  Ill,  §  567. 


ACTIONS  ON  CONTRACTS GENERAL  RULES        109 

3.  The  books  must  be  Identified  by  oath. 

4.  The  entries  must  be  pertinent  to  the  issue. 

5.  The  books  must  come  from  proper  custody. 

These  rules  apply  only  to  books  of  original  entry,  not  to 
ledgers  and  other  books  footed  from  original  entries. 

The  books  of  a  deceased  person  may  be  used  as  evidence 
both  for  and  against  him.  The  books,  however,  must  first  be 
properly  proved  by  the  clerk  who  made  the  entries  or  by  some- 
one who  can  testify  as  to  the  handwriting  of  the  deceased. 

Transactions  with  a  Party  Later  Deceased.  In  order  to 
protect  estates  against  fraud,  where  a  person  is  suing  to  en- 
force a  contract  against  the  executor  or  the  administrator  of 
a  person  who  is  dead,  he  will  not  be  allowed  to  testify  to  any 
transactions  with  the  deceased  person,  where  there  were  no 
other  witnesses  present  to  testify  as  to  what  the  deceased 
person  said  or  did.  This  is  very  important  to  remember, 
because,  in  the  case  of  an  oral  contract  where  no  witnesses 
were  present,  the  party  who  is  still  living  might  not  be  able 
to  prove  the  contract  at  all;  and  this  is  another  reason  why 
all  contracts  should  be  reduced  to  writing. 

Notes: 

1.  The  burden  of  proof  is  on  the  party  who  makes  an 

assertion. 

2.  Any  evidence,  in  order  to  be  introduced,  must  have 

some  direct  bearing  on  the  contract  itself,  or  on 
the  transactions  connected  with  its  making  and 
discharge. 

3.  Parol  evidence  cannot  be  introduced  to  vary  the 

terms  of  a  written  contract  except  in  case  of 
fraud,  duress,  undue  influence,  or  Illegality;  or 
where  the  contract  is  not  complete  in  itself  or  its 
terms  cannot  be  understood  without  reference  to 
outside  circumstances. 


no  CONTRACTS 

4.  A  party  cannot  use  his  own  words  and  acts  as 

evidence  in  his  favor;  but  his  admissions  against 
his  own  interest  may  be  used  against  him. 

5.  A  party  may  not  testify  to  his  transactions  with  a 

deceased  person  where  no  other  witnesses  were 
present. 


Review  Questions 

1.  What  is  the  rule  as  to  actions  where  there  are  joint  parties  to 

a  contract? 

2.  Does  a  person  bringing  suit  have  to  prove  that  the  agreement 

was   fair  and  that  the  defendant   went  into   it  voluntarily? 
Why  not? 

3.  When  can  a  person  be  compelled  to  carry  out  a  contract?     In 

what  court  would  such  a  suit  be  brought? 

4.  Can  you  give  three  "rules  of  equity"? 

5.  What  is  the  difficulty  in  proving  oral  contracts? 

6.  In  a  suit  who  has  the  "burden  of  proof"? 

7.  What  is  the  rule  as  to  parol   evidence?     What  exceptions  to 

this  rule? 

8.  What  is  the  rule  as  to  transactions  with  a  man  who  has  since 

died? 

9.  What  is  an  admission? 

10.  What  is  meant  by  the  rule,  "Hearsay  evidence  is  excluded"? 

Illustrate. 

11.  What  is  relevant  evidence? 

12.  What  is  competent  evidence? 

13.  State  the  rules  as  to  admission  of  books  of  account  as  evidence 

in  court. 

14.  When  are  books  of  account  of  a  deceased  person  admissible 

evidence  ? 


CHAPTER  Xttl 

TENDER  OF  PAYMENT  OR  PERFORMANCE! 

§  76.     Definition 

When  a  person  is  prevented  by  the  other  party  to  the  con- 
tract from  carrying  out  his  part  of  it,  he  may  make  sure  of 
his  own  rights  under  it  by  tendering  (that  is,  offering)  to 
pay  or  to  perform.  The  offer  must  be  made  by  the  party 
himself,  or  by  someone  he  has  authorized,  at  the  time  the 
contract  was  due  to  be  performed,  and  either  at  the  place 
specified  in  the  contract  for  goods,  etc.,  to  be  delivered,  or 
directly  to  the  other  party  or  any  agent  he  has  appointed 
to  receive  them.  For  instance,  if  the  other  party  had  ordered 
goods  to  be  delivered  to  a  railroad  company,  the  goods  might 
be  offered  to  the  railroad  as  an  agent  authorized  to  receive 
the  goods.  It  is  safer,  however,  to  offer  them  to  the  party 
himself,  as  then  no  question  can  arise  as  to  the  validity  of 
the  tender. 

Where  there  are  bulky  goods,  the  person  desiring  to  make 
the  tender  may  ask  the  other  party  to  name  a  place  where 
they  are  to  be  delivered,  and,  if  he  fails  to  do  so,  may  notify 
him  that  the  goods  will  be  delivered  to  him  at  a  certain  time 
and  place  most  convenient  for  that  other  party.  Then  delivery 
at  that  time  and  place  will  be  good  tender  although  the  other 
party  is  not  there  to  receive  the  goods. 

§  77.     Time  to  Tender  Performance 

The  tender  must  be  made  at  the  exact  time  specified  in 
the  contract,  and  before  sunset  on  that  day,  in  order  to  give 
the  other  party  a  chance  to  examine  the  goods,  etc.    A  tender 

III 


112  CONTRACTS 

before  the  time  for  performance  has  arrived  does  not  meet 
the  requirements  for  a  tender  and  will  not  save  the  rights 
of  the  party  making  it.  If  the  contract  specifies  "on  or  about" 
a  certain  day,  or  "within"  a  certain  time,  a  tender  made  a 
few  days  before  the  day  set  would  be  good.  If  a  party  cannot 
make  the  tender  before  sunset  because  the  other  party  has 
remained  away  all  day,  he  may  make  it  as  soon  as  the  other 
party  returns. 

If  a  party  positively  states  that  he  will  not  accept  a  tender 
under  any  circumstances,  or  has  the  party  making  it  put  off 
his  premises,  or  refuses  to  hear  him,  it  is  not  necessary  to  make 
the  offer.  The  party  from  whom  tender  is  due  may  explain 
to  the  court,  and  will  be  excused.  Unless  it  is  absolutely 
certain  that  it  will  be  impossible  to  make  a  tender,  however, 
the  party  should  at  least  try  to  make  it.  Only  the  absolute 
certainty  that  the  attempt  would  be  useless  will  excuse  him. 

§  78.     Extent  and  Kind  of  Tender 

The  exact  amount  of  goods  or  money  called  for  by  the 
contract,  including  any  interest  due,  and,  if  the  other  party 
has  begun  an  action  or  suffered  any  damages,  his  expenses 
or  the  damages  due,  also  must  be  offered.  If  it  is  money, 
the  party  should  take  care  that  it  is  in  "legal  tender."  This 
really  means,  as  a  usual  rule,  that  too  much  small  change 
should  not  be  offered.  Five-cent  pieces  are  a  legal  tender 
up  to  $5  and  not  over,  while  silver  coins  less  than  one  dollar 
are  a  legal  tender  up  to  $10  and  not  over.  United  States 
treasury  notes,  gold  coins,  and  silver  dollars  are  a  legal  tender 
to  any  amount.  Ordinary  bank  notes  are  not  legal  tender, 
but,  unless  objected  to  at  the  time,  a  tender  in  bank  notes 
would  be  good. 

If  it  is  not  possible  to  ascertain  the  exact  amount,  the 
party  should  take  care  to  offer  more  than  enough,  as  too  little 
will  not  make  a  good  tender. 


TENDER  OF  PAYMENT  OR  PERFORMANCE     113 

If  the  contract  called  for  services,  the  tender  will  consist  of 
notifying  the  other  party  that  the  party  is  ready  and  willing 
to  perform  the  services  whenever  required. 

A  tender  must  be  made  unconditionally.  The  party  must 
simply  offer  what  is  due  without  calling  for  an)^hing  in  return, 
not  even  a  receipt  or  change,  or  it  is  not  a  good  tender.  In 
all  cases  the  party  making  the  tender  should  be  accompanied 
by  a  competent  witness. 

A  tender  is  held  to  be  vitiated  by  coupling  it  with  a 
demand  for  a  receipt  for  the  sum  offered,  unless,  as  is  the 
case  in  a  few  jurisdictions,  a  statute  exists  which  allows  the 
demand  for  a  receipt.* 

§  79.    Acceptance  of  Tender 

If  a  party  keeps  property  or  money  that  has  been  left  with 
him  after  he  has  had  a  sufficiently  long  time  to  examine  and 
refuse  it,  it  amounts  to  an  acceptance  of  the  tender.  If  he 
refuses  to  accept,  the  party  making  the  tender  may  take  the 
goods  or  money  away,  and  inform  the  other  party  that  he  will 
hold  them  subject  to  his  orders ;  he  will  then  keep  the  goods 
or  money  separate  from  his  own  property  and  ready  at  all 
times  for  the  other  party  if  he  calls  for  them.  If  the  money 
is  deposited  in  a  bank,  it  must  be  put  in  a  separate  account  and 
not  drawn  upon. 


Review  Questions 

What  is  "tender"  in  legal  phraseology?    When  must  tender  be 

made?    What  will  excuse  tender? 
To  whom  may  tender  be  made,  other  than  to  the  contracting 

party  himself? 
What  is  the  rule  as  to  the  amount  tendered? 

^8  Cyc.   IS4. 


114 


CONTRACTS 


4.  What  constitutes  acceptance  of  tender? 

5.  What  kinds  and  amounts  of  money  are  "legal  tender"? 

6.  What  proofs  should  be  secured  of  fact  of  tender?    Can  a  receipt 

for  the  amount  paid  be  demanded? 

7.  If  tender  is  refused,  what  may  party  making  tender  do? 


CHAPTER  XIV 

JOINT  AND  SEVERAL  CONTRACTS 

§  80.    Contracts  Made  by  More  Than  Two  Parties 

Very  frequently  we  find  contracts  to  which  there  are  more 
than  two  parties ;  and  these  may  be  of  two  kinds,  namely,  what 
is  known  as  a  joint  contract,  in  which  all  the  parties  on  one 
side  agree  to  be  liable  together  for  what  is  promised  in  the 
contract,  each  one  being  bound  for  the  whole;  or  a  several 
contract,  where  each  of  the  parties  agrees  to  be  separately 
liable  for  his  part.  In  some  cases  parties  agree  to  be  both 
jointly  and  separately  liable,  and  then  the  person  with  whom 
the  agreement  was  made  has  his  choice  of  holding  all  of  them 
liable  together  or  each  one  liable  separately. 

It  is  unwise  to  become  involved  in  a  joint  contract.  Where 
the  parties  to  a  joint  contract  are  liable: 

1.  Each  is  liable  for  the  whole. 

2.  They  must  be  sued  together,  not  separately. 

3.  Where  one  dies  he  drops  out,  and  the  remainder 

are  liable.     If  all  died,  the  estate  of  the  last  de- 
cedent would  be  liable. 

4.  If  one  party  is  released,  all  are  released. 

Where  the  contract  itself  does  not  expressly  state  whether 
the  parties  are  to  be  liable  separately  or  all  together  for  the 
whole  contract,  the  court  decides  the  nature  of  the  contract 
from  the  probabilities  of  the  case.  If  the  promise  by  two  or 
more  is  in  the  plural,  the  contract  will  be  held  joint,  unless 
by  the  whole  agreement  the  intention  appears  to  hold  them 
severally.    For  instance,  the  ordinary  subscription  agfreement 

"5 


Ii()  CONTRACTS 

is  a  several,  not  a  joint,  contract,  and  no  one  would  imagine 
that  each  party  who  signed  expected  to  be  held  liable  for  the 
whole  amount  to  be  raised. 

Where,  instead  of  being  an  agreement  by  several  parties 
to  do  something,  the  agreement  was  to  do  something  for  the 
benefit  of  several  parties,  the  test  as  to  whether  it  is  a  joint 
or  a  several  contract  is  whether  the  agreement  has  to  be  per- 
formed for  all  of  them  together,  or  whether  it  can  be  per- 
formed for  each  one  separately.  Wherever  two  or  more  are 
jointly  to  benefit  by  a  contract,  ( i )  all  must  join  to  bring  suit 
on  the  contract;  (2)  if  one  dies  the  survivors  have  the  legal 
right  to  sue.  If  it  is  a  contract  made  to  a  corporation,  the 
corporation  will  be  regarded  as  one  person ;  but  all  the  mem- 
bers of  a  firm  will  have  to  join  in  any  suit  on  such  a  contract. 

If,  on  the  contrary,  it  is  an  agreement  to  perform  services 
for  several  persons  as  individuals,  it  usually  amounts  to  a 
separate  agreement  with  each  of  the  individuals,  and  each  of 
them  may  bring  suit  to  enforce  the  agreement  with  the  first 
party  without  paying  any  attention  to  the  other  persons. 

Where  there  is  more  than  one  person  on  either  or  on  both 
sides  of  a  contract,  it  should  be  stated  in  the  contract  whether 
their  obligation  is  joint  or  several,  or  whether  the  obligation  to 
them  is  jointly  or  severally.  To  do  so  will  save  much  trouble 
in  enforcing  the  contract,  as,  if  a  person  brings  suit  on  a  joint 
contract  against  one  person  only,  he  releases  all  the  rest  of 
them  from  their  obligations ;  while,  if  it  were  a  several  contract, 
he  may  bring  suits  against  one  after  the  other  until  he  has 
managed  to  collect  the  entire  amount  due  him. 

If  one  of  the  parties  to  a  joint  contract  pays  the  whole 
obligation,  he  may  collect  from  the  others  who  were  bound 
with  him  their  proportion  of  the  amount  he  had  to  pay. 

Notes: 

I.     Where  it  was  clearly  not  the  intention  of  the  parties 
to  be  liable  for  each  other,  the  contract  is  several. 


JOINT  AND  SEVERAL  CONTRACTS       117 

2.  Where  their  interest  is  identical  and  in  the  whole 

contract,  it  is  joint. 

3.  Where  they  intend  to  be  both  jointly  and  severally 

liable  on  the  whole  contract,  the  contract  is  joint 
and  several. 

4.  A  joint  contract  must  be  enforced  by  or  against  all 

of  the  parties  to  it. 

5.  A  party  to  whom  others  are  jointly  and  severally 

liable  may  sue  all  of  them  together,  or  he  may  sue 
one  at  a  time. 


Review  Questions 

1.  What  is  a  joint  contract?    May  more  than  two  parties  contract 

severally  ? 

2.  What  is  the  liability  of  a  person  who  is  party  to  a  joint  contract? 

3.  If  two  or  more  parties  sign  a  bond  beginning  "We,  the  under- 

signed, are  held  and  firmly  bound,"  etc.,  what  kind  of  contract 
is  it? 

4.  A  note  begins,  "Ninety  days  after  date,  we  or  either  of  us,  promise 

to  pay,"  etc.    What  kind  of  contract  is  it? 

5.  Distinguish  between  a  joint  and  a  joint  and  several  contract. 

6.  What  may  a  person  do  who  has  been  forced  to  pay  the  whole 

amount  on  a  joint  contract? 

7.  Give  examples  of  contracts  that  are  either  joint,  several,  or  joint 

and  several. 


PART  III 
SALES 


CHAPTER  XV 

CONTRACTS  TO  SELL^ 

§8i.     Sales  and  Contracts  to  Sell 

A  sale  is  a  completed  transaction.  The  ownership  of  the 
goods  has  passed  from  the  seller  to  the  buyer,  even  though  the 
seller  may  still  hold  the  goods  in  his  possession  and  the  price 
may  not  yet  have  been  paid. 

There  is  no  substantial  difference  between  a  sale  and  an 
exchange  or  barter,  and  the  term  "sale"  is  frequently  applied 
to  the  latter  transaction.  But  a  technical  sale  is  a  transfer 
for  a  consideration  in  money,  while  an  exchange  or  barter  is 
a  transfer  of  property  for  other  property. 

A  contract  to  sell  means  that  the  ownership  of  the  goods 
is  to  be  transferred  at  some  time  in  the  future. 

The  definitions  given  in  the  Uniform  Sales  Act  are  as 
follows : 

A  sale  of  goods  is  an  agreement  whereby  the  seller  trans- 
fers the  property  in  goods  to  the  buyer  for  a  consideration, 
called  the  price. 

A  contract  to  sell  goods  is  a  contract  whereby  the  seller 
agrees  to  transfer  the  property  in  goods  to  the  buyer  for  a 
consideration,  called  the  price. 

The  distinction  between  a  contract  to  sell  and  a  sale  is  this: 
in  a  contract  to  sell  the  goods  are  not  delivered  and  title  does 
not  pass;  while  in  a  sale  delivery  is  made  or  the  title  passes. 
A  contract  to  sell  is  an  executory  contract.  A  sale  or  a 
bargain  and  sale  is  an  executed  contract.  A  sale  is  the  transfer 
of  the  property  or  the  thing  from  the  seller  to  the  buyer  for 

'  For  forms  of  sales  contracts,  see  Chapter  CI,  Forms  20-35. 

I2X 


122  SALES 

a  price.    The  Statute  of  Frauds  applies  only  to  contracts  to 
sell.     (See  §  102.) 

§  82.    Uniform  Sales  Act 

On  account  of  the  confusion  of  the  law  in  regard  to  com- 
mercial transactions,  commissions  have  been  appointed  by  the 
various  states  to  unite  in  working  out  uniform  laws  governing 
such  transactions.  Largely  as  a  result  of  the  activities  of  these 
commissions,  two  laws  have  been  passed  by  many  states:  (i) 
The  Uniform  Negotiable  Instruments  Law  has  been  adopted 
in  all  of  the  states  and  territories  with  the  exception  of 
Georgia  and  Porto  Rico.  (2)  The  Uniform  Sales  Act  has 
been  adopted  in  the  following  states: 


Arizona 

New  Jersey 

Connecticut 

New  York 

Idaho 

North  Dakota 

Illinois 

Ohio 

Iowa 

Oregon 

Maryland 

Pennsylvania 

Massachusetts 

Rhode  Island 

Michigan 

Tennessee 

Minnesota 

Utah 

Mississippi 

Wisconsin 

Missouri 

Wyoming 

Nevada 

Territory  of  Alaska 

The  object  of  these  acts  is  not  to  change,  but  to  combine, 
the  best  features  of  the  existing  laws  of  the  different  states. 
In  some  cases  the  states  have  adopted  these  acts  with  slight 
modifications,  but  for  all  practical  purposes  the  law  is  uniform. 


CONTRACTS  TO  SELL  1 23 

§  83.    What  Is  Necessary  to  the  Contract  of  Sale 

A  contract  of  sale  (or  contract  to  sell)  must  have  the 
same  elements  as  any  other  contract.  In  other  words,  there 
must  be: 

1.  Parties  who  are  competent  to  contract. 

2.  An  agreement  between  those  parties. 

3.  Consideration  for  the  agreement. 

4.  A  legal  contract. 

5.  A  subject  matter. 

These  elements  have  all  been  explained  at  length  in  the 
preceding  chapters  relating  to  contracts  in  general.  (  See  Part 
II.)  A  few  peculiarities  which  concern  sales  alone  will  be 
taken  up  in  the  following  sections. 

Note: 

I.  A  sale  is  completed  when  the  goods  are  transferred, 
but,  if  the  buyer  was  not  competent  to  make  a  con- 
tract, or  the  contract  was  illegal,  the  seller  could 
not  collect  the  price. 

§  84.    The  Agreement 

This  has  been  fully  explained  under  contracts  (§42).  In 
the  sale  and  in  the  contract  to  sell,  there  must  be  the  proposal 
of  terms  on  the  one  hand,  and  the  acceptance  of  those  terms 
on  the  other. 

Notes: 

1.  To  make  a  legal  sale,  there  must  be  an  agreement  of 

the  parties  which  can  he  proved. 

2.  A  written  contract  signed  by  both  parties  is  the  best 

evidence  of  such  an  agreement. 

3.  A  letter  making  an  offer,  which  is  accepted  by  an- 

other letter,  is  the  simplest  form  of  written  con- 
tract. 


124 


SALES 


§  85.    Sales  to  Persons  Incompetent  to  Contract 

The  rules  which  have  been  laid  down  under  the  subject  of 
contracts  (§38)  with  regard  to  the  contracts  of  certain  per- 
sons who  are  by  law  made  incompetent  or  are  given 
only  a  qualified  power  to  contract,  apply  also  to  the  contract 
of  sale. 

The  exception  to  the  rules  laid  down,  is  an  actual  sale  of 
(not  a  contract  to  sell)  necessaries.  A  person  who  sells 
necessaries  to  a  person  who  is  not  competent  to  make  a  con- 
tract may  recover  a  reasonable  price  (not  necessarily  what  he 
asked)  for  them.  The  Uniform  Sales  Act  says  that  the  goods 
must  be  necessary  at  the  time  they  are  delivered. 

If  a  merchant  furnishes  necessaries  to  a  married  woman 
or  an  infant,  he  may  charge  them  (i)  to  the  woman  or  the 
infant,  or  (2)  he  may  charge  them  to  the  husband  or  the 
father.  He  cannot  charge  them  to  both.  He  must  make  his 
choice  and  afterward  bring  suit  against  the  party  charged. 

In  this  country  necessaries  include  only  food,  clothing,  and 
shelter  of  a  grade  suited  to  the  means  of  the  person  to  whom 
they  are  furnished;  and  in  this  connection  it  is  well  to  bear  in 
mind  that  such  things  as  riding  horses  and  automobiles  are 
not  necessaries. 

Notes: 

1.  In  supplying  necessaries  to  a  minor  or  married 

woman  the  merchant  should  inquire  ( i )  whether 
the  incompetent  person  is  already  provided;  (2) 
whether  he  or  she  has  any  property  from  which 
a  claim  for  necessaries  could  be  collected. 

2.  If  the  incompetent  person  is  an  infant  or  a  married 

woman,  and  the  merchant  desires  to  charge  the 
amount  to  the  father  or  the  husband,  he  should 
inquire  as  to  his  credit. 


CONTRACTS  TO  SELL  12$ 

§86.    The  Consideration 

A  sale  or  a  contract  of  sale  which  did  not  name  a  price 
might  still  be  good,  because  the  court  which  was  asked  to 
enforce  it  would  assume  that  the  goods  were  to  be  paid  for  at 
a  reasonable  price  and  charge  the  buyer  accordingly.  The 
price  fixed  may  be  dependent  on  outside  circumstances  that 
would  affect  it,  as  for  instance  the  market  price  at  the  time 
and  place  of  delivery. 

The  general  question  of  consideration  has  been  very  fully 
dicussed  under  "Contracts"  (§  44). 

Note: 
I.     Parties  in  making  a  sale  should  agree  on  the  price. 
Neither  the  seller  nor  the  buyer  may  be  satisfied 
with  what  the  law  will  consider  reasonable. 

§  87.     Nature  of  Subject  Matter 

A  person  might  make  a  contract  to  sell  a  crop  which  he 
had  just  planted,  or  grass  which  might  grow  in  the  future  on 
land  which  he  owned,  or  chickens  to  be  hatched  from  eggs 
which  his  hens  might  lay;  but  if  he  had  not  the  land  or  the 
hens,  he  could  not  make  a  contract  to  sell  grass  on  land  which 
he  might  buy  in  the  future,  or  eggs  from  hens  which  he  might 
later  acquire. 

Goods  which  are  already  in  existence  and  in  shape  to  be 
delivered  may  be  contracted  to  be  sold,  and  also : 

1.  Goods  which  still  require  some  process  to  render  them 

ready  for  delivery ;  i.e.,  cloth  to  be  made  by  a  tailor 
into  a  suit. 

2.  Goods  to  be  acquired  by  the  seller  in  the  future ;  i.e., 

a  commission  merchant  selling  so  many  dozens  of 
eggs  which  he  has  yet  to  buy  from  the  producer. 

3.  Goods  which  may  or  may  not  be  acquired  by  the 

seller  in  the  future,  depending  on  the  happening 


126  SALES 

of  some  condition;  i.e.,  the  same  commission 
merchant  selHng  so  many  dozens  of  eggs  provided 
that  he  can  obtain  that  number  from  the  producers. 

4,  An  undivided  share  in  goods;  i.e.,  a  tenth  part  of  a 

crop  of  wheat. 

5.  A  definite  number,  weight,  or  measure  of  goods  in 

mass;  i.e.,  a  bushel  of  oats  out  of  a  bin  of  oats. 

Under  the  Uniform  Sales  Act,  the  goods  mentioned  in  i, 
2,  and  3  cannot  be  the  subject  of  a  sale,  but  only  of  a  con- 
tract to  sell,  since  they  are  not  yet  in  shape  to  deliver. 

§  88.    Destruction  of  Subject  Matter 

When  the  goods  which  the  seller  is  offering  for  sale  have 
been  entirely  destroyed  without  his  knowledge  at  the  time  the 
agreement  is  entered  into,  the  contract,  of  sale  does  not  take 
effect.  When  they  have  been  partly  destroyed,  the  buyer  may 
refuse  to  take  any  of  them,  or  he  may  take  those  which  are  left 
and  pay  the  full  price  which  was  agreed  upon.  In  the  last 
case,  if  the  price  was  divided  up,  as  so  much  a  quart,  a  barrel, 
etc.,  he  may  pay  for  what  he  gets.  If  there  was  one  lump 
price  named  for  the  entire  lot,  he  must  pay  the  entire  amount, 
because  the  court  will  not  attempt  to  split  it  up  for  him.  To 
do  so  would  be  to  make  a  new  contract  for  the  parties. 

If  there  has  been  an  actual  sale  and  the  ownership  of  the 
goods  has  passed  to  the  buyer,  the  loss  falls  on  him  if  they  are 
destroyed  without  fault  of  the  seller,  even  though  they  remain 
in  the  seller's  possession.  If  the  ownership  still  remains  with 
the  seller,  the  loss  would  fall  on  the  seller,  wherever  the  goods 
may  be,  even  though  on  their  way  to  the  purchaser. 

Goods  are  sometimes  sold  with  the  privilege  of  returning 
if  not  sold  at  a  certain  time.  In  such  a  sale  the  title  passes 
and  in  event  of  destruction  by  fire,  the  buyer  would  lose.  The 
agreement  to  take  the  goods  back  is  a  condition  subsequent. 


CONTRACTS  TO  SELL  I27 

The  case  is  to  be  distinguished  from  that  in  which  the  goods 
are  sent  on  consignment.     (See  §  93.) 

Where  tlie  contract  was  not  for  any  specific  articles,  but 
only  for  so  many  feet  of  lumber,  bushels  of  wheat,  etc.,  the 
destruction  of  the  wheat  or  lumber  which  the  seller  had  at  the 
time  the  contract  was  made  would  not  excuse  him  from  per- 
forming it.  He  must  go  out  and  buy  more  to  replace  what 
was  lost. 

Note: 

I.  The  agreement  of  sale  should  be  very  definite  as  to 
the  time  when  the  ownership  is  to  pass  from  the 
seller  to  the  buyer.  Much  may  depend  on  this 
fact. 

§  89.     Sales  to  Arrive 

Contracts  are  made  at  times  for  the  sale  of  specific  goods 
to  arrive  on  a  named  ship.  This  arrival  is  a  condition  pre- 
cedent. If  the  goods  do  not  arrive,  or  if  they  arrive  on  another 
ship,  the  contract  is  nullified. 

§  90.     A  Contract  of  Sale  Must  Be  Legal 

Every  contract  must  be  legal  to  be  enforceable.  A  contract 
for  the  sale  of  liquor  in  a  prohibition  state  could  not  be  en- 
forced, and,  if  liquor  had  been  sold,  the  seller  could  not  recover 
the  purchase  price.  This  is  also  true  where  a  license  is  re- 
quired to  sell  any  particular  commodity.  An  unlicensed  seller 
could  not  collect.  ( See  general  discussion  of  illegal  contracts, 
§§  39»  57-) 

Note: 

I.  Where  there  has  been  an  illegal  contract,  the  courts 
will  leave  both  parties  just  where  they  found  them, 
and  refuse  to  help  either. 


128  SALES 

Review  Questions 

1.  Distinguish  sale  and  barter.     Distinguish  between  a  sale  and  a 

contract  to  sell. 

2.  Why  is  it  important  to  know  whether  a  particular  contract  is 

an  executed  or  an  executory  sale? 

3.  Why  are  uniform  sales  laws  desirable?    Has  the  Uniform  Sales 

Act  been  adopted  in  your  state? 

4.  Can  there  be  an  executed  sale  of  articles  not  in  existence? 

5.  When  a  seller  ostensibly  makes  a  present  sale  of  goods  which 

are  not  then  in  existence,  what  is  the  effect  on  the  contract? 

6.  If  goods  sold  are  partly  destroyed  at  time  of  sale,  what  right 

has  the  buyer? 

7.  If  the  sale  had  been  executed  before  the  damage  happened,  what 

would  be  the  rights  of  the  parties? 

8.  Give  meaning  and  legal  effect  of  a  sale  to  arrive. 

9.  B  made  sales,  without  a  license,  of  kerosene  and  liquor.     Can 

these  accounts  be  enforced  against  the  customers? 
10.    A,  a  retailer,  bought  goods  of  B  with  the  understanding  that 
unsold  goods  would  be  taken  back  at  the  end  of  the  season. 
Fire  destroyed  the  goods  without  fault  of  A,  while  in  A's 
possession.    Who  bears  the  loss? 


-     CHAPTER  XVI 

PASSING  TITLE 

§91.    Delivery 

In  a  sale — not  a  contract  of  sale  (see  §  81) — ^the  delivery 
is  made  at  the  time,  and  there  is  no  question  in  regard  to  the 
passing  of  title  from  seller  to  purchaser.  The  delivery  may 
consist  in  merely  setting  aside  the  goods  for  the  new  owner, 
but  the  title  passes,  and,  if  the  goods  are  afterwards  destroyed, 
the  loss  is  the  purchaser's.  In  one  case  delivery  consisted  in 
giving  the  purchaser  the  key  to  the  building  where  some 
machinery  was  stored.^ 

A  flood  or  a  railroad  accident  which  delays  the  delivery 
of  goods  is  not  an  excuse  for  failure  to  perform  a  positive 
contract.  It  is  a  general  rule  that,  where  an  engagement  to 
do  a  certain  thing  is  positive  in  its  terms,  an  accident,  or 
change  of  conditions,  will  not  excuse  performance.  The 
Japanese,  it  is  said,  look  at  this  matter  exactly  the  other  way, 
and  say  that  if  conditions  change  after  a  contract  has  been 
made  it  would  be  unjust  to  compel  performance. 

§  92.     Selection  Necessary  to  Delivery 

It  is  impossible  to  transfer  the  ownership  of  goods  that 
have  not  been  identified  or  set  aside.  A  contract  to  sell  an 
automobile  of  a  certain  make  does  not  transfer  the  title  to 
any  automobile  until  a  particular  automobile  has  been  desig- 
nated as  the  subject  matter  of  the  contract.  The  precise 
article  or  articles  that  are  to  constitute  the  subject  matter  of 
the  sale  must  be  agreed  upon.     This  means  that  the  subject 


^Kellogg  Newspaper  Co.  v.  Peterson,   163  111.   158. 

129 


I30 


SALES 


matter  of  the  sale  must  have  been  selected.  Usually  the  selec- 
tion is  made  by  the  buyer,  but  in  some  cases  the  buyer  directly 
or  indirectly  authorizes  the  seller  to  make  the  selection  for  him. 

In  the  case  mentioned  in  heading  4  under  §  87,  where 
there  is  the  sale  of  an  undivided  interest  in  goods,  no  actual 
delivery  or  selection  is  necessary.  By  the  sale,  the  purchaser 
acquires  whatever  the  seller's  rights  were  in  the  whole.  If 
the  seller  had  the  right  to  have  his  share  taken  out  of  the  mass, 
the  buyer  would  have  the  same  right ;  if  the  seller  had  a  right 
to  a  proportionate  share  only  in  the  price  received  when  the 
goods  were  sold,  the  buyer  would  get  only  the  same  right.  The 
time,  present  or  future,  when  the  title  will  pass  depends  on 
the  agreement. 

In  a  contract  to  sell,  the  time  for  the  title  to  pass  depends 
on  the  contract;  if  the  intention  of  the  parties  is  clearly  ex- 
pressed, it  passes  at  the  time  they  have  fixed  upon.  The  rules 
given  in  the  next  section  will  determine  when  it  passes  in  case 
the  intention  is  not  clearly  expressed. 

Note: 

I.  Any  act  which  the  parties  intend  to  represent  de- 
livery of  the  goods  will  be  a  sufficient  delivery. 
If  a  suit  of  clothes  has  been  selected  and  set  aside 
for  the  purchaser,  it  becomes  at  once  his  property. 

§  93.    When  the  Title  Passes 

The  following  are  rules  for  determining  the  intentions  of 
the  parties  as  to  the  time  at  which  the  title  passes,  i.e.,  at  which 
the  buyer  becomes  the  owner: 

1.  Where  goods  are  picked  out  and  are  in  the  shape  in 

which  they  are  to  be  delivered  at  the  tijne  the  con- 
tract is  made,  the  buyer  becomes  the  owner  at  that 
time. 

2.  When  the  goods  have  to  be  picked  out,  or  something 


PASSING  TITLE  131 

further  remains  to  be  done  to  them  before  they  can 
be  delivered,  the  buyer  does  not  become  the  owner 
until  that  is  done. 

3.  When  a  contract  is  made  to  sell  a  certain  number, 

weight,  or  measure  of  goods,  or  goods  to  be  ac- 
quired in  the  future  by  the  seller,  the  buyer  becomes 
the  owner  after  goods  answering  the  description 
in  the  contract  are  turned  over  to  him,  or  he  takes 
possession  of  them. 

4.  (a)   When  goods  are  delivered  "on  trial,"  or  "on 

approval,"  the  buyer  becomes  the  owner  upon  their 
delivery.  He  may,  however,  cease  to  be  the  owner 
and  make  the  seller  again  their  owner  by  returning 
them  or  notifying  the  seller  within  the  time  speci- 
fied in  the  contract,  or  a  reasonable  time  if  none 
was  specified,  that  he  will  not  accept  them, 
(b)  When  the  buyer  lets  the  time  fixed  for  the  re- 
turn of  the  goods  pass  without  returning  them,  or 
keeps  them  beyond  what  is  a  reasonable  time  under 
the  circumstances,  or  signifies  his  approval  and  his 
intention  to  keep  them  either  by  words  or  acts,  he 
becomes  their  permanent  owner. 

5.  If  the  agreement  requires  delivery  to  the  buyer  at  a 

particular  place,  or  payment  of  freight  to  the  buyer 
or  to  a  particular  place,  the  title  does  not  pass 
until  the  goods  have  reached  the  buyer  or  the  place 
agreed  upon. 

6.  When  goods  are  to  be  manufactured  the  title  does 

not  pass  until  they  are  completed  and  delivered 
to  or  accepted  by  the  party  who  ordered  them. 

7.  If  goods  are  ordered  and  shipping  directions  are 

given,  delivery  is  made  when  the  goods  are  de- 
livered to  the  railroad  or  other  means  of  transport. 
After  that  they  are  the  property  of  the  buyer. 


J  -1 2  SALES 

Note: 

I.     A  contract  to  sell  should  specify  precisely  when  title 
to  the  goods  is  to  pass. 

§  94.     Sales  Without  Delivery 

Whether  or  not  there  has  been  a  legal  delivery  such  as 
described  in  §  91,  it  is  always  a  risk  to  leave  property  in  the 
seller's  possession.  In  those  states  where  the  Uniform  Sales 
Act  has  been  adopted,  the  law  makes  a  seller  who  has  the 
goods  left  in  his  possession  the  agent  of  the  buyer  to  sell, 
pledge,  or  otherwise  dispose  of  them.  The  very  fact  that  the 
property  is  in  the  possession  of  the  seller  is  likely  to  mislead 
innocent  third  parties  who  have  no  notice  of  the  sale.  If 
the  seller  was  dishonest  enough  to  sell  the  property  again, 
there  would  be  no  chance  of  recovering  it  from  any  third 
party  to  whom  he  sold  or  pledged  it.  This  is  likewise  the 
case  in  California,  Colorado,  Kentucky,  Maine,  Montana, 
Oklahoma,  South  Dakota,  Vermont,  and  Washington.  The 
laws  in  the  states  enumerated  above  regard  leaving  the  prop- 
erty with  the  seller  as  opportunity  for  fraud  on  other  persons ; 
hence  the  party  who  so  left  the  property  must  lose,  if  the 
goods  are  sold  to  an  innocent  buyer.  This  is  just,  as,  if  a 
man  has  property  in  his  possession  it  is  fair  to  assume  that 
it  is  his,  and  if  he  sells  it  again,  the  new  buyer  should  be 
protected. 

In  other  states,  the  court  will  presume  that  leaving  the 
property  with  the  seller  amounts  to  a  fraud,  but  the  first  buyer 
may  prove  that  the  sale  to  himself  was  a  real  one,  made  in 
good  faith,  and  not  a  mere  sham  for  the  purpose  of  cheating 
anyone,  and  in  this  way  may  recover  his  property.  If  it  can 
be  shown  in  any  case  that  there  was  no  real  sale,  but  only  a 
pretended  one,  a  creditor  of  the  seller  may  treat  the  goods 
left  with  the  seller  as  belonging  to  the  latter  and  levy  on  them 
in  payment  of  his  claim. 


PASSING  TITLE  I33 

Where  for  any  reason  possession  is  to  be  left  with  the 
seller,  the  only  safe  method  for  the  buyer  is  to  take  a  formal 
bill  of  sale  and  to  file  it  on  record  in  the  proper  office  of 
registry  for  the  locality. 

Notes: 

1.  If  a  sale  is  made  the  seller  should  not  keep  the  goods. 

2.  If  the  seller  is  allowed  to  keep  the  goods  and  sells 

them  to  an  innocent  buyer,  the  first  buyer  or- 
dinarily loses. 

§  95.     Conditional  Sales 

It  is  possible  for  the  seller  to  give  the  purchaser  possession 
of  the  article  that  has  been  sold,  and  still  to  retain  the  ownership 
himself  until  the  full  price  or  a  certain  amount  of  the  price 
has  been  paid.  This  can  be  done  only  by  agreement,  however, 
and  where  sales  are  made  on  the  instalment  plan  it  is  very 
common  to  provide  in  the  agreement  of  sale  that  the  ownership 
shall  not  pass  from  the  seller  to  the  buyer  until  the  last  instal- 
ment has  been  paid.  Such  sales  are  known  as  "conditional 
sales." 

The  law  always  enforces  such  an  arrangement  as  between 
the  buyer  and  the  seller.  For  the  sake  of  ready  proof  and 
avoidance  of  misunderstandings,  the  contract  should  be  in 
writing  and  must  be  so  expressed  in  many  states.  A  common 
plan  is  for  part  payments  to  be  made  as  rent,  with  a  proviso 
that  the  title  passes  to  the  purchaser  when  the  last  instalment 
is  paid. 

The  difficulty  arises  from  the  fact  that,  as  the  buyer  has 
the  property  in  his  own  possession,  third  persons  are  likely 
to  be  misled  into  believing  that  he  owns  it  and  has  the  right 
to  dispose  of  it.  Most  of  the  states  get  around  the  difficulty 
by  providing  that  the  seller  must  file  the  contract  in  an  office 
of  public  record.  Everybody  is  then  required  to  know  that  it 
exists,  as  in  the  case  of  a  mortgage.     If  the  seller  does  not 


. , .  SALES 

put  the  contract  on  record,  and  the  buyer  is  dishonest  enough 
to  dispose  of  the  property  to  a  third  person  who  had  no 
knowledge  of  the  seller's  rights,  the  seller  loses  the  property 
in  the  majority  of  instances. 

§  96.     State  Laws  on  Conditional  Sales 

In  the  following  states  conditional  sales  are  good  against 
third  parties  without  acknowledgment  or  filing  in  any  public 

office: 

Arkansas  Nevada 

California  Rhode  Island 

Idaho  Tennessee 

Indiana  Utah 

The  District  of  Columbia,  Massachusetts,  Oregon  and 
Louisiana  have  substantially  the  same  law  with  a  few  ex- 
ceptions. 

In  the  following  states  the  contract  recorded  is  merely 
signed  by  the  purchaser : 

Alabama  Montana 

Kansas  New  York 

Maine  Oklahoma 

Maryland  Texas 

Minnesota  Vermont 
West  Virginia 

In  some  of  these  states  more  formality  is  required  if  the 
contract  is  for  the  sale  of  railroad  equipment. 

Those  states  which  demand  a  record  require  different 
formalities  in  order  to  permit  the  contract  to  be  put  on  record. 

§  97.    Requirement  of  Affidavits  to  Conditional  Sales  Contracts 

Some  states  require  an  affidavit  by  the  seller  stating  cer- 
tain facts  of  the  sale.     These  are  Michigan.  Nebraska,  New 


PASSING  TITLE  135 

Hampshire,  Ohio,  Pennsylvania,  and  Wyoming.  In  others, 
if  the  signature  to  the  contract  is  attested  by  a  witness,  the 
witness  may  prove  it,  and  it  is  then  admitted  to  record ;  very 
few  of  the  states  require  that  the  contract  shall  be  acknowl- 
edged in  person  by  the  buyer.  Colorado,  Connecticut  and 
District  of  Columbia  require  acknowledgment  where  the  sale 
is  over  $100  in  amount.  In  Iowa  it  may  be  acknowledged 
by  either  the  seller  or  buyer  and  is  then  entitled  to  be  ad- 
mitted to  record ;  while  in  Florida  the  seller  must  acknowledge 
in  person,  or  his  or  its  signatures  must  be  proved  by  one  of  two 
subscribing  witnesses. 

§  98.    Rights  in  Illinois  and  Pennsylvania 

In  Illinois  the  rights  of  the  seller  under  a  conditional  sale 
will  not  hold  against  a  third  party  to  whom  the  buyer  may 
have  sold  the  goods.  The  seller  may  protect  himself,  how- 
ever, by  taking  a  chattel  mortgage  on  the  article  sold  and 
recording  that.  In  Pennsylvania  where  the  property  is  not 
attached  or  to  be  attached  to  realty,  the  seller  makes  a  con- 
tract to  lease  the  property,  the  purchaser  to  pay  a  regular 
rental  instead  of  instalments  and  to  give  back  the  property 
at  the  end  of  the  rental  period.  Then  a  clause  is  added  giving 
the  purchaser  the  right  to  elect  to  keep  the  property  instead 
of  returning  it  at  the  expiration  of  the  lease.  Where  the 
property  covered  is  attached  or  to  be  attached  to  realty,  then 
either  a  conditional  sale  contract  or  a  lease  with  option  to 
purchase  may  be  used,  but  it  must  be  recorded  with  an  affidavit. 

§99.    Protection  Against  Landlord's  Lien 

In  those  states  where  a  landlord  has  a  lien  on  property 
in  rented  buildings,  the  contract  of  conditional  sale  should  be 
recorded  before  the  property  is  moved  into  the  building  in 
order  to  protect  it  against  his  lien. 

If  fixtures  such  as  gas  and  electric  chandeliers,  etc.,  are 


136  SALES 

sold  under  a  contract  of  conditional  sale,  they  will  be  pro- 
tected by  recording  the  contract  and  may  be  removed  as 
readily  as  any  other  personal  property.  If,  however,  the 
property  sold  was  afterwards  attached  to  the  building 
itself  and  could  not  be  removed  without  injury  to  it,  such 
as  a  mantel  or  built-in  china  closets  and  book-shelves,  the  only 
remedy  which  the  seller  has  is  to  claim  a  lien  against  the 
building  for  the  amount  due  him. 

§  100.    Protection  Against  Destruction  of  Property 

Where  the  property  is  destroyed  while  it  is  held  under 
a  contract  of  conditional  sale,  the  decisions  are  in  conflict.  In 
some  states  the  buyer  loses ;  in  others  the  seller ;  and  in  other 
states  the  matter  has  not  been  decided.  Usually,  under  such 
circumstances,  the  buyer  refuses  to  make  further  payments 
but  may  be  held  liable  for  the  value  of  the  goods.  Unless 
the  buyer  can  afford  such  a  possible  loss,  it  is  prudent  to 
provide  for  insurance. 

Notes: 

1.  If  a  sale  on  condition  is  to  be  made,  and  the  value 

of  the  article  justifies  it,  a  lawyer  should  be  em- 
ployed. 

2.  If  articles  are  to  be  sold  on  instalments  in  different 

states,  the  laws  of  each  must  be  considered  and 
much  care  will  be  required  in  making  the  con- 
tract.^ 


Review  Questions 

1.  When  does  title  pass  in  "a  sale"? 

2.  When  does  title  pass  under  a  sale  "on  trial"  or  "on  approval"? 

3.  When  does  title  pass  when  goods  are  manufactured  under  order  ? 

« The   standard   authority   on   this   general   subject   is   Haring's    "Conditional    Sale 
Laws,     published  by  the  author,  Fred  Benson  Hanng,  Buffalo,  N.  Y, 


PASSING  TITLE  137 

4.  When  does  title  pass  when  goods  are  ordered  to  be  shipped  by 

rail? 

5.  If  the  buyer  desires  to  leave  the  goods  he  has  bought  with  the 

seller,  how  can  he  protect  his  title? 

6.  If  the  buyer  after  taking  title  leaves  the  goods  with  the  seller, 

who  sells  them  to  a  third  party,  does  the  third  party  take 
good  title  in  your  state?  What  recourse  would  the  original 
buyer  have? 

7.  How  can  the  seller  part  with  possession  and  yet  keep  title  ?    What 

is  such  an  arrangement  called? 

8.  In  your  state  what  is  the  law  as  to  conditional  sales? 

9.  In  your  state  if  a  farmer  bought  a  binder  on  instalments  and 

it  was  burned  down  when  he  had  paid  but  half  the  purchase 
price,  whose  would  the  loss  be? 


CHAPTER  XVII 

THE  STATUTE  OF  FRAUDS 

§  loi.     Description  of  the  Statute  of  Frauds 

The  EngHsh  law  known  as  the  Statute  of  Frauds  was 
passed  in  1676.  Part  of  this  famous  law  has  been  examined 
in  §  48.  The  part  we  are  here  concerned  with  is  the  seventeenth 
section,  which  in  some  form  has  been  enacted  in  most  of  the 
states  and  is  as  follows : 

No  contract  for  the  sale  of  any  goods,  wares  and  mer- 
chandise, for  the  price  of  ten  pounds  sterling  or  upward  shall 
be  allowed  to  be  good;  except  the  buyer  shall  accept  part  of 
the  goods  so  sold  and  actually  receive  the  same,  or  give  some- 
thing in  earnest  to  bind  the  bargain  or  in  part  payment,  or 
that  some  note  or  memorandum  in  writing  of  the  said  bargain 
be  made,  and  signed  by  the  parties  to  be  charged  by  such 
contract  or  their  agents  thereunto  lawfully  authorized. 

The  Statute  of  Frauds  applies  to  contracts  to  sell,  not  to 
sales. 

"Goods,  wares  and  merchandise"  are  held  in  this  country 
to  include  all  that  is  usually  classed  as  personal  property, 
goods,  chattels,  and  choses  in  action,  i.e.,  accounts,  claims, 
contracts,  stocks,  and  securities. 

A  contract  for  the  sale  of  corporate  stocks  or  bonds  is 
good  if  some  memorandum  is  made  by  the  broker  before  suit 
is  brought. 

§  102.     Contracts  to  Sell 

The  definition  in  the  Uniform  Sales  Act  is  given  as  fol- 
lows : 

138 


THE  STATUTE  OF  FRAUDS  I39 

A  contract  to  sell  goods  is  a  contract  whereby  the  seller 
agrees  to  transfer  the  property  in  goods  to  the  buyer"  for  a 
consideration  called  the  price. 

The  distinction  between  a  contract  to  sell  and  a  sale  is  this : 
in  a  contract  to  sell,  the  goods  are  not  delivered  and  title  does 
not  pass;  while  in  a  sale,  delivery  is  made  or  the  title  passes 
to  the  purchaser. 

§  103,     When  the  Contract  of  Sale  Must  Be  in  Writing 

The  Statute  of  Frauds  discussed  in  §  10 1  applies  to  con- 
tracts of  sale  where  delivery  is  to  be  made  later  and  where 
the  value  Is  over  a  certain  amount.  This  amount  ranges  from 
$30  in  Arkansas,  Maine,  and  Missouri,  to  $500  in  Arizona, 
Massachusetts,  New  Jersey,  Rhode  Island  and  $2,500  in  Ohio. 
Fifty  dollars  is  usual. 

The  words  "in  value"  apply  where  the  Uniform  Sales  Act 
has  been  passed.  In  the  old  statute,  the  words  were  "in  price." 
The  price  is  the  amount  fixed  by  the  parties  themselves;  the 
value,  what  the  goods  are  actually  worth  in  the  market.  For 
this  reason,  contracts  purely  by  word  of  mouth  have  become 
more  risky  under  the  Uniform  Sales  Act.  In  order  that  a 
contract  of  sale  above  the  limited  amount  may  be  enforceable, 
a  written  memorandum  of  the  terms  of  the  agreement  must 
be  signed  by  the  party  against  whom  it  is  sought  to  enforce 
the  contract,  or  his  agent. 

The  written  memorandum  of  sale  required  by  the  Statute 
of  Frauds  need  not  be  formal.  It  may  be  a  note,  a  letter, 
a  telegram,  a  receipt,  or  may  consist  of  several  papers  so  con- 
nected as  to  make  an  intelligible  sales-contract.  The  written 
memorandum  of  sale  need  not  be  made  at  the  time  of  the  con- 
tract, but  it  must  state  all  the  material  facts,  the  parties,  the 
price,  if  a  price  was  agreed  upon,  and  specify  the  articles  to  be 
sold.  It  must  be  signed  by  the  party,  or  by  the  agent  of  the 
party  whom  it  is  desired  to  hold.    In  states  where  the  Unif(irm 


I40 


SALES 


Sales  Act  does  not  prevail,  the  written  memorandum  of  sale 
may  have  to  be  subscribed;  that  is,  signed  at  the  end  of  the 
contract. 

Exceptions  to  the  rule  that  a  sale  of  goods  above  the 
limited  amount  must  be  in  writing,  occur:  ( i )  when  the  buyer 
has  paid  part  of  the  price,  or  (2)  where  the  buyer  has  accepted 
and  actually  received  part  of  the  goods.  The  last  two  methods 
of  satisfying  the  statute  will  be  considered  in  the  following 
sections. 

Notes: 

1.  Any  contract  of  sale  above  the  specified  minimum 

must  be  in  writing. 

2.  All  contracts  should  be  in  writing. 

§  104.     Exception  for  Part  Pa)mient 

A  payment  made  at  the  time  of  entering  into  the  con- 
tract of  sale  makes  it  enforceable,  though  it  may  be  above 
the  limited  value.  The  payment  may  either  be  a  part  of  the 
price,  or  something  given  or  paid  to  "bind  the  bargain."  This 
should,  strictly  speaking,  be  in  addition  to  the  purchase  price. 
In  England  this  earnest  is  no  part  of  the  price  of  the  goods. 
Usually  in  this  country  it  is  part  of  the  price.  The  amount 
is  not  material. 

The  thing  delivered  in  part  payment  must  be  of  some 
value,  but  if  of  any  value  at  all,  it  will  be  sufficient  to  bind 
the  bargain.* 

Note: 

I.  Part  payment  will  bind  the  bargain,  but  it  is  no 
evidence  as  to  time,  terms,  and  essentials  of  the 
agreement,  and  it  is  a  poor  substitute  for  a  written 
contract. 


*Weir  V.  Hadnut,  115  Md.  525. 


THE  STATUTE  OF  FRAUDS  141 

§  105.    Exception  for  Part  Ddivecy 

The  second  case  mentioiied  in  §  103  was:  "Where  the  bnjer 
has  accepted  and  actually  received  part  of  the  goods."  The 
word  "received"  means  taken  into  actnal  physical  possession, 
die  word  "accepted"  means  diat  the  boyer  most  have  deter- 
mined in  his  own  mind  to  become  the  owner  of  the  goods. 
Both  conditions  must  be  fulfilled  to  make  die  ccHitiact  en- 
forceaUe.  The  bi^er  may  show  his  consent  to  beccHne  the 
owner  of  the  goods  eidier  by  his  words  or  by  his  conduct. 

The  "part  of  the  goods"  must  be  taken  out  of  the  actnal 
amount  of  the  goods  to  be  delivered.  Samples  or  specimens 
which  do  not  come  out  of  the  buyer's  share  are  not  "part  of 
die  goods." 

If  the  buyer  has  directed  the  goods  to  be  delivered  to  a 
railroad  axiqiai^  for  transportation,  a  delivery  to  the  railroad 
ccnnpany  is  a  delivery  to  him  and  their  receipt  for  the  goods 
will  be  his  receipt  If  he  has  not  so  directed,  there  is  no 
receipt  and  acceptance  until  the  buyer  or  his  agent  accepts  the 
goods  f  rcmi  die  railroad  company. 

JJote: 

I.  Although  he  may  have  accepted  the  goods,  the  pur- 
chaser could  still  dispute  the  price,  the  warranties, 
and  die  other  terms  of  the  agreement.  The  writ- 
ten contract  is  the  only  dependable  means  of  prov- 
ing the  agreement. 

§  106.    Exception  for  Amounts  Below  Specified  Vafaie 

Contracts  of  sale  below  the  minimum  established  by  the 
law  need  not  be  in  writing.  If  the  transaction  were  below  the 
value  set  in  any  particular  state,  suit  could  be  brought  on  an 
oral  contract ;  Le.,  a  contract  not  in  writing.  If  it  were  proved, 
it  could  be  enforced,  but  an  oral  contract  is  always  hard  to 
prove.    (See  §  46-) 


142  SALES 

If  the  contract  of  sale  is  above  the  minimum  value,  suit 
cannot  be  brought  upon  it  unless  it  is  in  writing.  If  the  parties 
to  such  a  contract  (not  in  writing)  carry  it  out,  it  becomes  an 
executed  sale  and  stands,  as  does  any  other  sale,  but  if  either 
party  refuses  to  carry  it  out,  the  other  cannot  enforce  it  at  law. 

A  single  contract  for  the  sale  of  a  number  of  articles,  each 
of  which  is  below  the  limited  amount  in  value,  must  neverthe- 
less be  in  writing  if  the  value  of  all  together  is  greater  than 
the  limited  amount. 

Notes: 

1.  It  is  safest  to  make  all  contracts  in  writing. 

2.  Any  contract  of  sale  above  the  specified  minimum 

must  be  in  writing  except  in  cases  of  part  pay- 
ment or  part  delivery.  Any  contract  of  sale  below 
the  minimum  should  be  in  writing. 

3.  It  is  never  safe  to  enter  into  any  contract  without 

some  memorandum  in  writing.  Especially  is  this 
true  when  there  is  anything  indefinite  about  the 
possible  value  of  the  goods  to  be  sold. 

§  107.     Exception  for  Work  or  Services 

If  the  article  purchased  involves  work  or  services  which 
make  it  suitable  only  for  the  original  buyer,  the  contract 
may  be  oral.  For  example,  a  man  goes  to  a  dentist  and 
orders  a  set  of  false  teeth.  The  dentist  takes  some  porcelain 
and  other  materials  worth  very  much  less  than  $50  and  out 
of  them  makes  a  set  for  which  he  charges  considerably  over 
$50.  His  work  and  skill  are  what  give  the  teeth  their  value, 
and  the  teeth  which  are  made  for  one  man  cannot  be  sold 
to  another.  In  such  a  case  the  law  says  it  is  the  dentist's 
services,  not  the  materials,  for  which  the  man  is  paying,  and 
the  contract  is  not  one  of  sale  and  need  not  be  subject  to  any 
of  the  conditions  mentioned  in  §  103.  That  is,  the  dentist 
can  bring  suit  without  a  written  contract. 


THE  STATUTE  OF  FRAUDS  143 

If  the  article  to  be  made  is  something  which  can  be  sold 
to  someone  else,  the  contract  is  one  of  sale  and  must  satisfy 
the  requirements  of  the  Statute  of  Frauds. 

The  foregoing  is  a  statement  of  the  law  where  the  Uniform 
Sales  Act  applies.  There  have  been  two  other  views  of  the 
case:  one  of  them,  the  English  rule  that  if  any  article  was 
to  be  made  as  a  result  of  work  and  services,  the  contract 
was  one  of  sale;  the  other,  the  former  New  York  rule,  that 
if  there  was  any  work  to  be  performed  on  the  article,  the 
contract  was  not  a  sale  but  for  work  and  services,  and  the 
Statute  of  Frauds  did  not  apply  to  it.  Either  of  these  two 
rules  may  still  apply  in  a  state  which  has  not  adopted  the 
Uniform  Sales  Act. 

Note: 

I.     Have  a  written  contract  in  all  cases  where  the  price 
is  more  than  you  can  afford  to  lose. 


Review  Questions 

1.  Distinguish  between  a  "sale"  and  "contract  to  sell." 

2.  Has  the  Uniform  Sales  Act  been  adopted  in  your  state? 

3.  In  your  state  what  is  the  amount  over  which  contracts  must  be 

in  writing?     Must  this  amount  be  "in  value"  or  "in  price"? 

4.  Who   must   sign   the   memorandum   required   by  the    Statute   of 

Frauds?     Why  should  both  parties  sign? 

5.  When  should  the  memorandum  required  by  the  Statute  of  Frauds 

be  made  and  what  should  be  its  form? 

6.  What  exceptions  are  there  to  the  rule  in  the  Statute  of  Frauds 

as  to  the  written  memorandum? 

7.  What  is  the  rule  in  your  state  as  to  contracts  for  work  and 

services  ? 

8.  What  are  "goods,  wares  and  merchandise"  within  the  meaning  of 

the  Statute  of  Frauds? 


CHAPTER  XVIII 

WARRANTIES' 

§  1 08.    Introductory 

The  definition  of  a  warranty  in  the  Standard  Dictionary- 
is: 

An  assurance  or  undertaking  by  the  seller  of  property, 
express  or  implied,  that  the  property  is  or  shall  be  as  it  is 
represented  or  promised  to  be,  as  to  quantity,  quality,  or  title. 

If  a  farmer  goes  into  an  agricultural  warehouse  and  asks 
to  look  at  mowing  machines,  and  after  having  inspected  the 
stock  and  obtained  prices  to  his  satisfaction,  says  he  will  take 
the  one  which  he  has  selected,  he  has  assumed  the  responsi- 
bility for  its  fitness  himself  and  has  no  recourse  as  to  the 
seller  for  damages  afterward  if  it  should  prove  unsatisfactory. 
The  court  would  apply  the  maxim  caveat  emptor,  the  ancient 
and  harsh  doctrine  of  the  common  law,  signifying,  "let  the 
buyer  beware."  The  common  law  took  a  sporting  view  of 
the  dealings  between  buyer  and  seller,  and  did  not  wish  to 
discourage  skill  in  barter  by  stressing  too  much  any  ethical 
considerations. 

At  the  present  day,  however,  both  law  and  trade  morality 
have  advanced  a  long  way  beyond  this  primitive  conception 
of  the  rights  of  buyer  and  seller.  Nearly  all  trade  transactions 
are  now  based  on  certain  contract  conditions,  expressed  or 
implied,  by  which  the  risk  to  the  buyer  is  largely  eliminated. 
A  change  of  property  for  a  consideration  rarely  takes  place 


*For  form  of  warranty  contract,  see  Chapter  CI,  Form  25. 

144 


WARRANTIES  I45 

without  some  conditions  or  warranties  as  to  quality,  utility, 
or  other  characteristics  of  the  commodity  sold. 

Note: 

I.  The  buyer  should  take  care  that  he  has  a  warranty 
that  what  he  purchases  will  serve  his  purpose. 

§  109.     Conditions  Precedent 

An  agreement  that  an  article  must  be  up  to  a  certain 
standard  is  known  as  a  condition  precedent. 

A  condition  precedent  is  a  specification  of  the  kind  of 
article  that  is  wanted  with  which  the  article  must  comply 
before  there  can  be  any  sale  at  all. 

If  it  is  agreed  that  the  article  to  be  sold  is  to  conform 
to  a  certain  standard,  there  is  no  sale  until  an  article  is 
produced  according  to  that  standard.  For  instance,  if  the 
seller  agreed  to  furnish  a  steam  pump  that  would  raise  100 
gallons  a  minute  to  a  height  of  50  feet,  he  must  furnish  a 
pump  that  will  do  exactly  this  before  the  buyer  is  obliged 
to  take  it. 

Another  example  of  a  condition  precedent  occurs  in  a 
provision  that  work  to  be  done  or  goods  to  be  delivered  must 
be  satisfactory  to  or  approved  by  some  third  party,  as  when 
a  church  organ  is  installed,  to  be  approved  by  some  musical 
expert. 

All  executory  contracts  are,  in  fact,  contracts  with  per- 
formance as  a  condition  precedent  to  payment. 

Note: 

I.  Where  there  has  been  an  agreement  that  the  article 
to  be  sold  shall  be  of  a  certain  kind  and  quality, 
the  buyer  is  not  obliged  to  take  any  article  that 
is  not  of  that  kind  and  quality. 


146 


SALES 


§110.     Conditions  Subsequent 

A  condition  subsequent  is  a  condition  that  may  defeat 
the  sale  after  its  completion,  and  give  the  buyer  the  right  to 
return  it  and  recover  the  price  if  he  had  paid  for  it. 

The  technical  distinction  between  a  condition  subsequent 
and  a  warranty  has  been  wiped  out  by  the  Uniform  Sales  Act. 
Formerly,  a  breach  of  warranty  entitled  the  injured  party  only 
to  damages,  while  a  breach  of  condition  gave  him  his  choice 
of  suing  for  damages  or  returning  the  goods.  By  the  Uniform 
Sales  Act  the  buyer  who  suffers  a  breach  of  warranty  now 
has  the  same  choice  of  remedies  that  the  buyer  who  suffers 
a  breach  of  condition  has  always  had.  Wherever  this  act  is 
in  force  the  buyer,  whether  under  warranty  or  under  condi- 
tion, has  his  choice  of  suing  or  of  returning  the  goods. 

§111.    Express  Warranties 

An  express  warranty  is  a  statement  made  by  the  seller 
about  the  quality,  durability,  working  ability,  etc.,  of  the 
article  sold  in  order  to  induce  the  buyer  to  purchase.  The 
purchaser  must  have  bought  the  goods  in  reliance  on  that 
statement.  If  he  relies  on  his  own  judgment  and  selects  the 
goods  himself,  there  is  no  warranty  even  though  the  seller 
makes  a  statement  of  fact. 

Any  statement  of  fact  or  any  promise  by  the  seller  in 
regard  to  the  quantity,  quality,  or  title  of  a  commodity  is  an 
express  warranty,  if  the  natural  effect  of  such  a  statement 
is  to  induce  the  buyer  to  purchase  the  goods,  and  if  the  buyer 
does  purchase  the  goods  relying  on  such  statements. 

If  there  is  a  warranty,  and  upon  using  the  goods  it  turns 
out  to  be  untrue,  under  the  Uniform  Sales  Act  the  buyer  may 
return  the  goods,  or  he  may  sue  the  seller  and  recover 
damages  in  the  amount  of  the  difference  between  what  the 
article  is  actually  worth  to  him  and  what  it  would  have  been 
worth  had  the  warranty  been  true.     (See  §  114.) 


WARRANTIES  147 

If  a  merchant  tells  you  that  his  goods  are  the  best  on  the 
market,  this  is  not  an  express  warranty,  as  it  amounts  merely 
to  his  opinion  of  them,  and  is  what  is  called  "merchant's 
puffing."  If,  on  the  other  hand,  he  makes  an  express  state- 
ment that  these  goods  will  wear  better  than  certain  similar 
goods  manufactured  by  another  firm,  you  may  rely  on  his 
statement  as  an  express  warranty. 

It  is  always  well  to  get  a  warranty  in  the  most  definite 
terms  possible,  for  if  a  merchant  is  really  willing  to  warrant 
his  goods  he  will  not  be  afraid  to  say  so  in  plain  language 
if  the  buyer  insists  upon  it.  If  the  merchant  is  not  willing 
to  make  a  definite  warranty,  it  is  better  for  the  buyer  to  know 
it  beforehand  and  to  realize  that  he  is  relying  on  his  own 
judgment  and  can  claim  nothing  from  the  merchant  in  case 
the  goods  prove  unsatisfactory.  A  written  warranty  prevents 
forget  fulness  on  the  part  of  the  seller. 

Notes: 

1.  In  all  purchases,  make  sure  that  all  terms  are  plainly 

written  out,  in  positive  language. 

2.  In  all  prospectuses,  analyze  the  statements  and  note 

the  positive  assertions  as  to  material  matters. 

§  112.     Implied  Warranties 

In  every  sale  today  there  are  certain  implied  warranties 
which  the  law  compels  the  seller  to  make  good.  In  regard 
to  his  right  to  sell  the  property,  he  warrants  by  the  mere  act 
of  selling  goods : 

1.  That  he  has  a  right  to  sell  the  goods,  or,  if  it  be  a 

contract  of  sale,  that  he  will  have  the  right  to 
sell  them  when  the  time  for  the  sale  arrives. 

2.  That  the  buyer  shall  not  be  disturbed  by  any  claims 

made  by  others  against  the  goods. 


148  SALES 

3.     That  the  goods  are  free  from  any  claim,  charge,  or 
incumbrance  at  the  time  of  the  sale. 

These  warranties  do  not  apply  to  sheriff's  sales  and  auction 
sales.  There  the  buyer  takes  the  risk  that  the  article  may  be 
claimed  by  someone  else. 

If  the  seller  sells  stolen  goods,  the  buyer  will  be  forced 
to  return  the  goods  to  their  rightful  owner,  but  he  may,  if 
he  can,  recover  from  the  seller  the  damages  which  he  has 
suffered  because  of  the  sale. 

Special  Situations.  There  is  what  seems  to  the  public  a 
curious  situation  here.  If  the  seller  had  actually  stolen  the 
goods,  the  buyer  would  have  to  give  them  up  to  the  rightful 
owner  even  though  he  knew  nothing  of  the  theft;  whereas,  if 
the  seller  had  obtained  the  goods  with  the  consent  of  the 
rightful  owner  through  fraud,  the  buyer,  ignorant  of  the 
fraud,  might  be  allowed  to  keep  them.  There  is  a  case  where 
a  man  bought  some  jewelry  on  credit  by  representing  himself 
to  be  another  man,  and  afterwards  sold  the  jewelry  to  a 
third  person  who  had  no  knowledge  of  the  fraud,  and  the 
third  person  was  allowed  to  keep  the  jewelry.  This  is  because 
the  jeweler  gave  up  the  property  of  his  own  accord  to  the 
fraudulent  seller  and  therefore  enabled  the  seller  to  lead  the 
third  person  into  buying  the  jewelry  and  paying  out  his  money 
for  it. 

Other  Implied  Warranties.  There  are  two  other  war- 
ranties which  go  with  a  sale  of  goods  even  though  nothing 
is  said  about  them. 

I.  If  the  buyer  makes  known  to  the  seller  the  purpose 
for  which  he  intends  to  use  the  goods,  or  if  this  purpose  was 
known  to  the  seller,  there  is  a  warranty  that  the  goods  are 
fit  for  the  purpose. 

Whenever  a  person  goes  into  a  market  or  a  grocery  store 
to  buy  food,  the  butcher  or  the  grocer  is  supposed  to  know 


WARRANTIES  149 

that  he  is  buying  it  for  the  purpose  of  eating  it  and  there 
is,  therefore,  a  warranty  that  the  food  is  fit  to  eat. 

If  the  buyer  orders  goods  by  their  trade-names  (Quaker 
Oats,  Ivory  Soap,  etc.),  the  seller  is  relieved  from  any  war- 
ranty that  they  are  fit  for  his  purpose. 

2.  If  goods  are  bought  from  a  person  who  regularly  deals 
in  that  kind  of  goods,  there  is  a  warranty  that  they  are  of 
merchantable,  that  is,  salable  quality. 

When  a  person  orders  goods  from  a  description  in  a  sales 
catalogue,  or  from  a  sample,  there  is  also  an  implied  warranty 
that  they  are  similar  to  the  description  or  sample. 

The  seller  is  liable  in  damages  to  the  buyer  if  any  of 
these  warranties  are  broken.  He  is  liable  only  to  the  im- 
mediate buyer,  however,  and  not  to  other  persons  to  whom 
the  buyer  sells  the  goods,  although  he  may,  if  he  manufactured 
the  article  himself,  be  liable  for  any  injuries  suffered  as  the 
result  of  a  defect  in  it. 

Note: 

I,  The  fact  that  the  law  implies  certain  warranties 
should  not  prevent  the  buyer  from  obtaining  posi- 
tive written  warranties  on  all  important  pur- 
chases. 


Review  Questions 

1.  What  is  a  warranty? 

2.  Is  a  warranty  of  quality  of  a  chattel  implied  by  the  mere  fact 

of  sale?     What  is  the  rule? 

3.  Distinguish  a  condition  precedent  from  warranty. 

4.  Distinguish  a  condition  subsequent  from  warranty. 

5.  May  an  injured  party  treat  breach  of  a  condition  subsequent 

as  a  breach  of  warranty? 

6.  What  two  elements  constitute  an  express  warranty?    Distinguish 

between  a  "statement  of  fact"  and  an  "expression  of  opinion." 


I50  SALES 

7.  What  are  the  implied  warranties  of  ownership  where  a  sale  is 

made?    What  are  the  implied  warranties  of  quality? 

8.  To  what  classes  of  sales  do  the  implied  warranties  of  ownership 

not  apply? 

9.  Does  a  warranty   follow  the  goods  through  successive  sales? 

What  exception  is  there  to  this  rule? 
10.    To  whom  only  is  the  seller  liable  for  a  breach  of  an  implied 
warranty  ? 


CHAPTER  XIX 

REMEDIES 

§  113.     Rights  of  Unpaid  Seller  Under  the  Contract 

The  various  sorts  of  warranties  protect  the  buyer  in  all 
business  transactions.  It  is  necessary  also  that  the  rights  of 
the  seller  be  protected.  Most  breaches  of  contract  in  cases 
of  sale  arise  from  the  failure  of  the  buyer  to  make  the  required 
payments.  In  such  cases  the  goods  may  be  in  the  possession 
of  one  of  the  following  three  parties: 

1.  The  unpaid  seller  may  still  have  the  goods  in  his 

own  possession;  or 

2.  They  may  be  in  the  possession  of  a  railroad,  a  steam- 

ship, or  an  express  company  for  the  purpose  of 
shipment  to  the  buyer;  or 

3.  They  may  be  in  the  possession  of  the  buyer  himself. 

A  seller  is  still  unpaid  if  he  has  been  given  a  bad  check 
or  note  in  return  for  the  goods. 

I.  If  the  seller  has  the  goods  in  his  own  possession,  and 
if  they  were  not  sold  on  credit,  any  of  the  following  courses 
is  possible: 

(a)  The  seller  may  in  most  cases  refuse  to  give  them 

up  until  they  are  paid  for.  If,  however,  the  sale 
is  on  credit,  and  the  seller  has  no  reason  to  believe 
that  the  buyer  is  insolvent,  the  seller's  duty  would 
be  to  deliver  the  goods. 

(b)  If  the  goods  are  of  a  perishable  nature,  or  if  the 

buyer  has  failed  to  pay  for  an  unreasonable  length 
of  time,  or  if  the  seller  has  reserved  that  right 
in  his  agreement  of  sale,  he  may  resell  them  to 

1=^1 


IS3 


SALES 


another  person,  keep  the  price,  and  sue  the  buyer 
for  damages  for  any  loss  he  may  have  sustained 
by  the  transaction. 

(c)  The  seller  may,  if  the  time  for  payment  has  arrived, 

notify  the  buyer  that  he  holds  the  goods  for  him 
and  sue  him  for  the  price. 

(d)  The  seller  may,  if  the  time  for  payment  has  arrived 

and  no  payment  has  been  made,  sue  the  buyer 
for  damages  for  breach  of  the  contract. 

The  measure  of  damages  will  be  the  difference  between 
what  the  seller  can  sell  the  goods  for  to  someone  else,  and  the 
contract  price.  If  the  seller  was  manufacturing  the  article, 
he  may  claim  damages  for  whatever  loss  he  has  sustained  in 
time  or  otherwise  up  to  the  time  the  buyer  notified  him  that 
he  refused  to  take  the  article,  not  for  any  loss  through  con- 
tinuing the  work  after  that.  Of  course,  if  he  can  sell  the 
article  when  finished  to  someone  else  at  the  same  price,  there 
is  no  loss. 

If  the  goods  were  sold  on  credit,  and  the  term  of  credit 
has  expired  while  they  are  still  in  the  seller's  possession,  or 
if  the  buyer  has  become  insolvent,  then  the  seller  may  exercise 
either  of  the  last  two  rights. 

2.  If  the  goods  have  been  delivered  to  a  railroad  com- 
pany, etc.,  for  transportation,  the  seller's  rights  may  be  sum- 
med up  as  follows: 

(a)  If  in  giving  the  goods  to  the  railroad  company  for 
transportation  the  seller  reserves  the  right  of 
ownership  to  himself,  he  may  refuse  to  allow 
the  goods  to  be  delivered  to  the  buyer  until  the 
latter  pays  the  purchase  price.  The  seller  may 
keep  control  by  shipping  to  himself  at  the  destina- 
tion. Then,  until  he  assigns  the  bill  of  lading  to 
the  buyer,  the  control  is  in  his  hands. 


REMEDIES  153 

(b)  If  the  buyer  becomes  insolvent  and  the  goods  are 
in  transit,  the  seller  may  stop  their  delivery  and 
enforce  any  of  the  remedies  mentioned  under 
(i),  provided  the  railroad,  express  company,  or 
other  carrier,  has  not  informed  the  buyer  that 
they  are  holding  the  goods  subject  to  his  orders. 
The  seller  cannot,  of  course,  stop  the  delivery  of 
the  goods  after  they  are  in  the  possession  of  the 
buyer  or  his  agent,  even  though  it  was  before 
they  reached  their  destination.  If  there  has  been 
a  bill  of  lading  issued  for  the  goods,  the  railroad 
company  may  refuse  to  give  them  up  until  the 
bill  of  lading  is  returned. 

Until  the  goods  have  come  into  the  possession  of  the  buyer, 
the  seller's  right  of  stoppage  in  transitu  is  superior  to  any 
other  claim.  Other  creditors  have  tried  to  attach  goods  under 
such  circumstances,  but  the  courts  have  always  maintained 
the  seller's  priority  unless  the  buyer  himself  had  received  them, 
or  they  had  rightfully  passed  under  his  control.  The  buyer 
could  not  defeat  the  right  of  stoppage  by  selling  the  goods  in 
transit  to  a  third  party.  The  third  party  would  have  the  same 
rights  as  the  first  buyer  and  no  more. 

A  seller  who  stops  goods  in  transit  on  a  mere  rumor  of 
the  buyer's  insolvency  will  be  liable  for  damages  if  the  buyer 
is  really  solvent. 

3.  If  the  goods  have  come  into  the  possession  of  the 
buyer,  they  are  his  property  and  the  seller  has  lost  all  claim 
to  them.  The  seller  can  only  bring  suit  for  the  price  if  it  is 
not  paid  when  due. 

Note: 

I.  A  provision  permitting  the  seller  to  resell  the  goods 
in  the  event  of  non-payment  before  delivery 
should  be  inserted  in  the  contract  in  those  cases 


154 


SALES 


where  the  buyer's  credit  is  not  dependable.  This 
allows  him  to  protect  himself  by  selling  them 
without  running  the  risk  of  being  held  guilty  of 
breakiner  the  contract. 


'fc. 


§  114.     Rights  of  Buyer 

When  a  salesman  sells  goods  to  a  customer,  the  employer 
has  the  right  to  refuse  to  accept  the  order  of  the  customer, 
but,  if  the  customer  can  prove  actual  damage,  the  employer 
will  be  liable  to  the  extent  thereof.  By  allowing  the  salesman 
to  hold  himself  out  as  an  authorized  agent  with  the  power  of 
sale,  the  employer  makes  himself  liable  for  his  acts. 

Where  the  seller  refuses  to  give  up  the  goods  to  the  buyer, 
except  where  the  buyer  does  not  pay  at  the  proper  time 
(see  §  113): 

1.  The  buyer  may  have  the  right  to  the  ownership  of 

the  goods.  In  this  case  he  may  sue  the  seller  for 
damages  for  withholding  the  goods,  or  he  may 
bring  what  is  known  as  an  "action  in  replevin" 
to  get  possession  of  the  particular  goods. 

2.  Or  the  buyer  may  have  no  right  of  ownership  over 

the  goods,  but  only  a  right  under  the  contract  to 
have  the  goods  delivered  to  him.    In  this  case: 

(a)  The  buyer  may  sue  the  seller  for  damages 

for  breach  of  the  contract;  or 

(b)  If  the  article  was  of  a  special  kind  or  made 

to  order  so  that  he  could  not  get  it  any- 
.where  else,  the  buyer  may  go  into  a  court 
of  equity  and  sue  to  compel  the  seller  to 
perform  his  contract. 

The  measure  of  damages  in  any  of  these  cases  is  the 
diflference  between  what  the  buyer  could  go  out  into  the 
market  and  buy  the  goods  for,  and  the  contract  price.    If  he 


REMEDIES  155 

could  get  them  for  the  same  price  or  less  in  the  market,  he 
would,  of  course,  have  suffered  no  damages. 

Where  the  seller  delivers  or  tenders  the  goods  hut  they 
fail  to  come  up  to  a  warranty  which  he  has  made  for  them, 
the  Uniform  Sales  Act  allows  the  buyer  the  following 
remedies : 

1.  He  may  accept  or  keep  the  goods  and  set  up  against 

the  seller  the  breach  of  warranty  by  way  of  re- 
coupment in  diminution  or  extinction  of  the  price. 

2.  He  may  accept  or  keep  the  goods  and  maintain  an 

action  against  the  seller  for  damages  for  the  breach 
of  warranty. 

3.  He  may  refuse  to  accept  the  goods,  if  the  property 

therein  has  not  passed,  and  maintain  an  action 
against  the  seller  for  damages  for  the  breach  of 
warranty. 

4.  He  may  rescind  the  contract  to  sell,  or  the  sale,  and 

refuse  to  receive  the  goods,  or  if  the  goods  have 
already  been  received,  return  them  or  offer  to 
return  them  to  the  seller  and  recover  the  price 
or  any  part  thereof  which  has  been  paid. 

When  the  buyer  has  claimed  and  has  been  granted  a  remedy 
in  any  one  of  these  ways,  no  other  remedy  is  thereafter 
granted. 

The  buyer  must  send  back  the  goods  in  as  good  condition 
as  that  in  which  they  were  received,  unless  the  damage  lias 
resulted  because  of  the  fact  that  they  were  not  as  warranted. 
He  cannot  return  them  if  he  has  once  accepted  them  knowing 
that  they  were  not  as  warranted,  or  if  he  has  failed  to  notify 
the  seller  within  a  reasonable  time  that  he  refuses  to  take 
them. 

If  the  goods  are  really  not  as  warranted,  and  notice  has 
been  given  to  the  seller  that  the  buyer  refuses  to  take  the 


jgg  SALES 

goods,  the  buyer  cannot  be  held  liable  for  the  price.  If  he 
has  paid  any  part  of  the  sum  due,  he  is  entitled  to  have  that 
money  back  before  returning  the  goods,  and,  if  necessary,  may 
sell  the  goods  to  another  party  in  order  to  get  back  what  he 
has  paid  on  them,  handing  over  the  surplus  to  the  seller. 

The  measure  of  damages  which  the  buyer  may  recover 
for  a  breach  of  the  contract  of  warranty  is  the  difference 
between  v/hat  the  goods  were  actually  worth  at  the  time  they 
were  delivered,  and  what  they  would  have  been  worth  if  they 
had  been  as  warranted. 

Note: 

I.  In  any  case  where  the  buyer  intends  to  assert  his 
rights,  he  should  act  promptly.  Delay  may  be 
fatal.  A  buyer  should  never  accept  goods  without 
examining  them.  Where  there  was  a  warranty 
of  durability,  he  should  notify  the  seller  of  his 
dissatisfaction,  or  refusal  to  accept  the  goods, 
just  as  soon  as  he  discovers  that  they  are  not  up 
to  the  warranty.  It  is  a  prudent  thing  in  such  a 
case  to  provide  in  the  agreement  of  sale  that  the 
buyer  may  keep  back  part  of  the  purchase  price 
till  he  has  tested  the  article  warranted. 

§  115.    Rescission  of  Sale 

A'  rescission  results  from  failure  to  perform  a  contract  of 
sale.  Both  parties  may  now  agree  or  one  party  may  call  it 
off  and  the  other  may  acquiesce.  If  the  other  does  not  ac- 
quiesce, the  rights  of  the  parties  must  be  determined  by  suit 
as  set  forth  in  the  earlier  part  of  this  chapter. 

In  case  of  rescission:  (i)  The  buyer  and  the  seller  may 
agree  to  cancel  the  contract.  (2)  When  the  seller  has  the 
goods  in  his  possession  or  has  stopped  them  on  the  way  to 
the  buyer,  he  may  call  off  the  sale  if  he  has  reserved  that 


REMEDIES  157 

right  in  the  contract  and  the  buyer  does  not  carry  out  his 
agreement:  or  if  the  buyer  fails  to  pay  for  the  goods  within 
a  reasonable  length  of  time,  (3)  The  buyer  may  call  off  the 
contract  if  the  goods  are  not  as  warranted. 

When  the  sale  is  called  off  by  agreement,  the  buyer  must 
return  the  goods  to  the  seller,  and  the  seller  must  return  the 
price  to  the  buyer.  But  the  buyer  may  keep  the  goods  until 
the  seller  pays  him  back  what  he  has  paid,  and  the  seller  may 
keep  the  price  until  the  buyer  returns  the  goods.  Either  party 
may  take  the  initiative.  The  one  who  most  desires  to  cancel 
the  sale  will  probably  move  first. 

When  goods  are  not  up  to  the  warranty  the  buyer  must 
return  the  goods  in  the  same  condition  in  which  they  were 
when  he  received  them.  He  may  either  actually  return  them 
or  notify  the  seller  that  he  refuses  to  accept  them  and  will 
hold  them  subject  to  his  order. 

Note: 

I.  Either  party  who  wants  to  call  off  the  sale  should 
do  so  just  as  soon  as  he  finds  out  that  he  has 
good  reason  to  cancel  it.  The  court  will  not  look 
with  favor  on  any  delay,  as  it  is  not  fair  to  the 
other  party.  The  buyer  may  sell  the  goods  if 
necessary  and  get  out  of  the  money  realized  what 
he  has  paid  on  them.  If  he  has  paid  the  entire 
price  and  the  goods  do  not  realize  that  amount 
when  sold,  he  may  sue  the  seller  for  what  he  has 
lost  on  the  transaction. 


158 


SALES 


Review  Questions 


1.  What  recourse  has  a  seller  who  has  the  goods  still  in  his  posses- 

sion:  (a)   If  a  sale  was  to  be  for  cash;    (b)   if  it  was  on 
credit;  (c)  if  the  goods  are  perishable? 

2.  How  can  goods  be  shipped  so  that  title  remains  in  the  seller? 

3.  What  is  meant  by  the  right  of  "stoppage  in  transitu"?     If  this 

right  is  exercised  on  a  false  rumor  of  the  buyer's  insolvency, 
what  is  the  effect? 

4.  A   seller  of  goods   under   contract   that   no   payment   is   to  be 

made  till  all  goods  are  shipped,  ships  some,  and  then  finds 
that  the  buyer  has  failed.    What  can  the  seller  do  ? 

5.  If  a  seller  wrongfully  refuses  to  deliver  goods,  what  remedy 

has  the  buyer?     When  can  the  buyer  enforce  specific   per- 
formance of  his  contract? 

6.  A   salesman   sells   a  bill  of   goods.     The   employer   refuses   to 

accept  the  order.     Has  the  buyer  any  recourse? 

7.  When  goods  are  ordered  and  on  arrival  they  fail  to  come  up 

to  a  warranty  that  has  been  made,  what  two  alternatives  has 
the  buyer? 

8.  How  can  a  sale  be  called  off? 

9.  Jackson  bought  70  cords  of  wood  of   Smith.     The  wood  was 

piled  and  measured  on  Smith's  property,  and  Jackson  was  to 
come  to  get  it.  Nothing  more  was  said.  Before  Jackson 
paid  for  or  took  the  wood  away,  he  went  into  bankruptcy. 
His  receiver  claimed  the  wood,  which  the  seller  refused  to 
give  up.  Who  was  right? 
10.  Farley  sold  a  carload  of  furniture  to  a  retail  firm.  While  the 
goods  were  en  route  over  the  railroad,  he  learned  that  the 
firm  was  insolvent,  and  accordingly  ordered  the  railroad  to 
return  the  lot  to  him,  offering  freight  and  other  charges.  The 
railroad,  however,  claimed  that  it  had  attached  the  goods  to 
satisfy  a  claim  of  its  own  against  the  insolvent  firm.  Could 
such  attachment  take  precedence  of  the  seller's  lien? 


CHAPTER  XX 

SALES  AT  AUCTION 

§  ii6.     Regulations  for  Sales  at  Auction 

A  sale  at  auction  is  held  in  accordance  with  terms  printed 
in  the  auction  bills.  The  sale  is  made  when  the  auctioneer 
lets  his  hammer  fall.  He  need  not  accept  any  bid  unless 
required  to  do  so  by  the  terms  of  the  printed  auction  adver- 
tisement. Generally  such  an  advertisement  will  specify  that 
the  property  is  to  be  sold  to  the  highest  bidder.  An  auctioneer 
may  refuse  to  recognize  bids  that  are  not  substantially  higher 
than  the  last  bid,  the  amount  depending  on  the  value  of  the 
article  offered  for  sale. 

If  the  seller  had  printed  in  the  auction  bill  a  provision 
that  he  reserved  the  right  to  take  part  in  the  bidding  himself, 
he  might  bid  at  the  sale  or  have  his  friends  do  so  for  him. 
Otherwise  if  the  seller  himself  bids,  or  has  bids  made  for 
him,  the  person  to  whom  the  goods  are  finally  knocked  down 
may  refuse  to  take  them  if  he  discovers  the  situation. 

§  117.     Compliance  with  Conditions 

The  sale  may  be  made  on  some  condition.  The  buyer 
must  then  comply  with  the  condition  before  he  can  receive 
the  goods.  Sometimes  bidders  are  required  to  make  a  deposit 
before  being  allowed  to  bid;  sometimes  they  are  required  to 
make  a  deposit  after  the  bid  is  accepted.  If  the  bidder  does 
not  comply  with  the  terms  of  the  sale  he  forfeits  this  deposit, 
unless  it  appears  that  the  seller  could  not  give  him  good  title 
to  the  property,  in  which  case  he  may  recover  his  deposit  and 
refuse  to  take  the  goods. 

159 


l6o  SALES 

A  purchaser  at  an  auction  sale  must  always  pay  cash  before 
he  is  entitled  to  the  property  unless  the  printed  terms  provide 
otherwise. 

The  seller  may  sue  the  purchaser  for  damages  if  the  pur- 
chaser fails  to  take  property  which  was  knocked  down  to  him. 
The  seller  may  also  sell  the  goods  to  someone  else  for  what 
he  can  get  for  them.  This  amount  will  be  deducted  from 
his  damages. 

§  ii8.     Duties  of  Auctioneer 

The  auctioneer  acts  as  an  agent  for  the  seller  in  selling 
the  property;  for  the  buyer  in  signing  a  memorandum  of  the 
sale.  The  seller  will  be  bound  to  carry  out  the  sale  which 
the  auctioneer  makes,  and  the  buyer  to  take  the  goods  accord- 
ing to  the  memorandum  of  sale.  An  auctioneer  is  not  allowed 
to  bid  for  himself  at  a  sale,  but  he  may  make  bids  for  some- 
one else.  If  he  does  not  state  for  whom  he  is  selling  the 
property,  he  is  personally  responsible  to  the  purchaser  for 
seeing  that  the  terms  of  the  sale  are  carried  out. 

An  auctioneer  who  sells  property  that  does  not  belong  to 
the  seller  is  personally  responsible  to  the  owner  of  the  property, 
even  though  he  honestly  thought  it  was  part  of  the  goods 
to  be  sold.  Because  of  all  this  responsibility,  the  law  usually 
requires  an  auctioneer  to  have  a  license.  In  New  York  a  man 
must  take  out  a  license  to  act  as  auctioneer  in  order  to  sell 
even  his  own  property. 

The  auctioneer  has  a  lien  on  the  property  for  his  com- 
mission, and  may  require  the  commission  to  be  paid  him  before 
giving  up  the  property  to  the  purchaser. 

Note: 

I.  In  planning  for  an  auction  sale,  all  the  terms  should 
be  decided  upon  and  printed  in  the  handbills  ad- 
vertising it.     If  the  owner  of  the  property  wants 


SALES  AT  AUCTION  l6i 

lo  reserve  the  right  to  bid  or  to  have  bids  made 
for  him,  it  must  be  definitely  stated. 


Review  Questions 

1.  Has  the  owner  of  goods  sold  at  auction  the  legal  right  to  bid 

on  them? 

2.  What  should  be  announced  in  the  auction  bills  ? 

3.  Whose  agent  is  the  auctioneer? 

4.  In  your  state  does  the  auctioneer  have  to  be  licensed?     May  a 

man  sell  his  own  goods  at  auction  without  a  license? 

5.  What  lien  has  an  auctioneer? 


PARl^  IV 
AGENCY 


CHAPTER  XXI 

PRINCIPLES  OF  AGENCY 

§119.    Introductory 

In  the  complex  commercial  life  of  today  much  of  the 
world's  business  is  of  necessity  transacted  by  proxy.  The 
amount  of  business  that  one  man  can  do  is  limited.  Hence, 
to  conduct  the  great  activities  of  the  world,  those  with  execu- 
tive ability  empower  others  to  act  for  them.  At  the  present 
time  the  larger  proportion  of  business  men  are  not  doing 
business  for  themselves,  but  are  acting  as  agents  for  others. 
On  this  account  the  subject  of  agency  is  of  primary  im- 
portance. Many  men  are  principals,  yet  more  are  agents; 
and  all  have  to  do  with  agents  and  should  know  what  agents' 
powers  are  and  just  how  far  they  represent  their  principals. 
The  matter  of  agency  enters  into  all  departments  of  business 
and  will  come  up  again  and  again  in  the  treatment  of  other 
subjects  in  this  work.  The  subject  of  agency  is  of  vital  im- 
portance in  insurance,  partnership,  and  corporation  law. 

§  120.     Definitions 

An  agent  is  one  who  represents,  or  is  authorized  to  repre- 
sent, another  person  in  a  business  transaction  or  transactions 
with  third  parties. 

The  person  represented  is  known  as  the  "principal." 

The  person  appointed  may  be  known  as  "agent,"  "factor," 
"broker,"  "attorney,"  "proxy,"  "delegate,"  or  "representative." 

The  relation  between  the  principal  and  the  agent  is  termed 
"agency." 

165 


i66  AGENCY 

§  121.     The  Principal 

Anyone  capable  of  transacting  his  own  business  may  ap- 
point an  agent  to  act  for  him  in  the  same  matters.  A  standard 
text-book  expresses  it  thus : 

It  may  be  stated  as  the  general  rule,  by  the  common  law 
every  person  who  is  competent  to  act  in  his  own  right,  and 
in  his  own  behalf,  may  appoint  an  agent. ^ 

In  the  California  Code  it  is  expressed  as  follows: 

Any  person  having  capacity  to  contract,  may  appoint  an 
agent. 

The  legal  doctrine  of  agency  is  based  on  the  principle 
that  whatever  a  person  may  do  for  himself,  he  may  do  by 
another  person.  The  person  who  appoints  an  agent  must  be, 
therefore,  capable  of  transacting  his  own  business;  that  is, 
when  he  appoints  an  agent,  he  must  be  sane,  sober,  and  capable 
of  acting  for  himself,  and  also,  he  must  be  of  full  age — hence 
a  minor  cannot  appoint  an  agent. 

The  following  are  legally  qualified  to  be  principals : 

1.  Corporations  may  appoint  agents  to  accomplish  their 

corporate  purposes — in  fact,  a  corporation  can  act 
only  by  its  agents. 

2.  Partnerships  may  appoint  agents,  and  apart  from 

this  each  partner  is  held  to  be  an  agent  for  the  firm. 

3.  Married  women  may  appoint  agents. 

4.  Unincorporated    clubs    and    societies    may    appoint 

agents. 

Notes: 

I.     The  principal  must  be  competent  to  act,  and  in  his 
sane  mind. 


'  Mechem  on  .Agency,   129;  Cyc.  31,  p.  1175. 


PRINCIPLES  OF  AGENCY  167 

2.  Infants  are  not  competent  to  act  for  themselves,  and 

hence  cannot  appoint  agents. 

3.  Partnerships,  clubs,  and  societies  may  be  principals. 

4.  Corporations  can  operate  only  through  agents. 

§  122.     The  Agent 

Any  person  who  is  qualified  to  perform  a  particular  act 
may  do  it  as  the  agent  of  another. 

Anyone  who  has  capacity  to  act  for  himself  is  ordinarily 
capable  of  acting  as  agent  for  another  ....  it  is  generally 
thought  he  may  be  capable  of  acting  as  agent  for  another, 
although  he  is  not  capable  of  acting  for  himself.  ^ 

The  point  to  be  noted  in  this  statement  is  that  a  person 
may  be  legally  incompetent  to  act  for  himself,  but  yet  may 
lawfully  act  as  agent  for  someone  else.  For  instance,  a  minor, 
i.e.,  anyone  under  age,  cannot  contract  for  himself,  but  he 
may  act  as  agent  for  an  older  person  and  what  he  does  will 
bind  the  older  person.' 

A  child  may  be  the  agent  of  his  parent.  But  it  must  be 
because  the  child  has  been  appointed  an  agent,  not  simply 
because  he  is  the  child  of,  or  is  living  in  the  house  with,  the 
parents.  In  such  cases,  to  be  an  agent,  the  child  must  have 
been  directly  authorized  by  the  parent  to  act  along  certain 
lines,  or  else  it  must  be  shown  that  the  child  had  been  in  the 
habit  of  so  acting  with  the  approval  of  his  father  or  mother. 

In  a  New  Hampshire  case  the  judge  said: 

A  son  has  no  authority,  as  such,  to  lend  his  father's 
property,  and  there  is  no  presumption  that  such  authority  has 
been  given  the  son.* 


*  31  Cyc.  1 21 2;  Lyon  &  Co.  v.  Kent,  45  Ala.  s<5. 

•  Sheldon  v.  Newton,  3  Ohio  State  494. 
'Johnson  v.   Stone,  ^o  N.   H.   197. 


1 68  AGENCY 

Notes: 

1.  A  minor  who  cannot  contract  for  himself  may  con- 

tract as  an  agent  for  someone  else. 

2.  Anyone  can  be  an  agent  to  do  anything  he  is  suffi- 

ciently intelligent  to  do. 

3.  A  parent  is  not  bound  by  the  contract  of  a  minor 

child  unless  he  has  expressly  or  impliedly  made 
the  child  his  agent. 

§  123.     General  Agents 

A  general  agent  is  one  authorized  to  assume  entire  charge 
of  his  principal's  business,  or  all  of  one  phase  of  the  business, 
or  all  of  his  principal's  business  at  some  particular  place. 

Unless  notified  to  the  contrary,  people  dealing  with  an 
agent  have  the  right  to  presume  that  his  agency  is  a  general 
one,  and  that  he  is  authorized  to  do  anything  usually  done  in 
such  a  business.  A  general  agent  has  unrestricted  powers  to 
deal  along  the  line  he  Is  engaged  in. 

The  manager  of  a  business  Is  a  general  agent  with  power 
to  use  his  Individual  judgment  and  to  act  largely  upon  his 
own  Initiative.  His  employer  controls  and  limits  his  general 
policy,  but  he  does  many  specific  acts  at  his  own  discretion, 
and  delegates  authority  In  minor  details  to  subagents  who 
answer  to  him  for  what  they  do. 

For  instance,  the  manager  of  a  grocery  store  Is  a  general 
agent  for  that  purpose  and  has  authority  to  purchase  all  kinds 
of  goods  that  are  sold  in  the  store,  and  to  contract  for  neces- 
sary repairs  and  Improvements  in  the  store.  He  has  no 
authority  to  buy  dry-goods,  hardware,  or  other  things  outside 
his  line  of  business.  He  has  no  authority  to  sell  the  whole 
store,  or  to  buy  real  estate,  or  to  build  a  new  store.  If  such 
an  agent  wanted  to  contract  for  an  addition  to  the  existing 
store,  the  contractor  would  do  well  to  find  out  whether  or 


PRINCIPLES  OF  AGENCY  169 

not  the  agent  had  authority  to  do  this,  because  this  would  seem 
not  to  be  included  in  his  general  authority. 

An  agent  may  possess  direct  authority  to  bind  his  prin- 
cipal in  a  particular  transaction ;  that  is  to  say,  the  principal 
may  expressly  empower  the  agent  to  bind  him;  and  this 
direct  authority  will  carry  with  it,  by  implication  of  law,  such 
powers  as  are  suitable  and  reasonably  necessary  to  accomplish 
the  intended  purpose.® 

A  superintendent  of  a  factory  is  a  general  agent  for  the 
purpose  of  running  the  factory,  and  is  presumed  to  have 
power  and  authority  to  do  anything  necessary  to  keep  it  in 
operation,  and  in  case  of  emergency  to  preserve  the  business 
and  the  building  and  to  protect  the  employees. 

Notes: 

1.  A  general  agent  has  wide  powers  in  his  particular 

line  of  business. 

2.  He  has  no  authority  to  bind  his  principal  outside 

of  his  general  line  of  business. 

3.  It  is  expedient  to  know,  when  you  are  dealing  with 

an  agent,  whether  he  is  a  general  agent  or  a 
special  agent. 

4.  A   third    person,    having    ascertained   the    general 

character  and  the  scope  of  an  agency,  may  rely 
on  the  agent's  having  such  powers  as  naturally 
and  properly  belong  to  his  position. 

5.  In  doubtful  cases,  it  Is  safest  for  those  dealing  with 

a  general  agent  to  ascertain  the  extent  of  his 
authority. 

§  124.     Special  Agents 

A  special  agent  Is  one  authorized  to  act  In  a  specific  trans- 
action or  in  a  limited  line  of  business.     The  authority  of  a 


»  Hackett  v.  Frank,  105  Mo.  App.  384. 


I70  AGENCY 

special  agent  is  not  so  broad  as  the  authority  of  a  general 
agent. 

A  special  agent  is  authorized  to  do  some  special  thing. 
He  may  make,  for  instance,  but  the  one  contract  or  the  one 
sale  for  which  he  has  been  appointed.  Should  he  do  some 
other  special  thing,  which  he  honestly  considers  more  to  the 
interest  of  his  principal,  he  would  depart  from  his  instruc- 
tions and  he  alone  would  be  liable;  the  party  represented 
would  not  be  bound.  For  example,  an  agent  authorized  to 
sell  a  particular  painting  would  have  authority  to  sell  that 
painting  and  to  bind  his  principal  in  what  he  did  in  connection 
with  the  one  transaction,  but  he  would  have  no  authority 
to  do  anything  else. 

Similarly,  a  special  agent  might  be  authorized  to  buy 
wheat  for  his  principal ;  in  that  case  he  would  have  no  right 
to  buy  lumber,  coal,  or  another  grain,  but  he  could  bind  his 
principal  in  any  transaction  for  the  purchase  of  wheat.  If 
the  agent  has  an  established  office  or  place  of  business  where 
he  has  been  doing  business  for  some  time  with  a  sign  or  signs 
indicating  his  agency  and  line  of  business,  a  third  person 
would  be  safe  in  doing  business  with  him  in  the  particular 
line. 

In  dealing  with  a  special  agent  engaged  for  a  particular 
transaction,  a  third  party  should  ask  to  see  the  agent's  au- 
thorization, which  is  usually  in  writing. 

In  a  New  York  case,  a  father  authorized  his  son,  to  accept 
a  draft  for  $2,000,  drawn  upon  the  father  at  not  less  than 
thirty  days.  The  son  accepted  a  draft  for  $482,  payable 
ninety  days  after  date,  in  the  name  of  his  father.  The  court 
held  that  he  was  a  "special  agent,"  and  had  no  right  to  go 
outside  of  his  authority.® 

A  written  request  to  a  real  estate  broker  as  special  agent, 
to  find  a  purchaser  for  real  estate,  does  not  confer  upon  him 


•  Nixon  V.  Palmer,  8  N.  Y.  398, 


PRINCIPLES  OF  AGENCY  17  i 

any  authority  to  sign  a  binding  contract  of  sale  for  his 
principal.  To  do  this,  he  must  also  have  authority  from  his 
principal  to  sell. 

Notes: 

1.  A  special  agent  has  limited  authority. 

2.  This  authority  may  be  indicated  by: 

(a)  Written  authorization, 

(b)  An  established  office  with  signs  and  adver- 

tisements. 

(c)  A  continued  course  of  dealing. 

3.  No  one  can  become  the  agent  of  another  except  by 

the  will,  expressed  or  implied,  of  the  principal. 

4.  An  agent  cannot  create  in  himself  a  particular  au- 

thority merely  by  the  performance  of  the  act. 

§  125.     Del  Credere  Agents 

A  del  credere  agent  is  one  who  gfua^rantees  to  his  principal 
that  any  goods  sold  by  the  agent  will  be  paid  for. 

An  agent  employed  to  sell  goods  sometimes  guarantees 
his  principal  against  loss  from  any  of  the  customers  to  whom 
he  sells ;  in  such  case,  the  agent  is  termed  a  del  credere  agent. 
It  is  not  a  common  arrangement,  but  nevertheless  it  is  used 
occasionally  in  mercantile  circles. 

A  factor  with  a  del  credere  commission  or  agency  is  one 
who  in  consideration  of  a  higher  compensation  expressly 
agrees  to  pay  his  principal  the  price  of  the  goods  he  sells 
himself,  if  the  purchaser  does  not.' 

A  contract  of  a  commission  merchant  whereby  he,  for  a 
commission  of  5  per  cent,  undertakes  to  sell  goods  and  guaran- 
tees his  sales,  need  not  be  in  writing.* 


'  20  Cyc.  186. 

»  Sherwood  v.  Stone,  14  N.  Y.  267. 


\ 


172  AGENCY 

Review  Questions 

1.  Who  may  appoint  an  agent? 

2.  Who  may  act  as  agent  though  not  as  principal? 

3.  Distinguish  between  general  and  special  agents. 

4.  Can  a  real  estate  agent  as  such  sign  a  contract  binding  his  prin- 

cipal to  sell? 

5.  What  is  a  del  credere  agent? 

6.  If  a  boy  came  into  a  store  and  wanted  to  buy  an  Ingersoll  watch 

and  have  it  charged  to  his  father,  what  would  you  advise? 


CHAPTER  XXII 

THE  CONTRACT  OF  AGENCY^ 

§  126.     Appointment 

The  appointment  of  an  agent  may  be  oral,  written,  or  by 
usage.  An  agent  can  be  legally  appointed  for  most  purposes 
by  an  oral  or  spoken  contract.  The  objection  to  an  oral  con- 
tract is  the  difficulty  of  proving  it,  and  the  strong  probability 
that  there  will  be  some  misunderstanding  as  to  the  terms  of 
the  contract  between  the  parties.  For  all  ordinary  purposes, 
an  oral  contract  of  agency  is  just  as  binding  as  a  written  con- 
tract, provided  its  terms  can  be  proved. 

Usually  an  agent  is  appointed  in  writing;  either  a  formal 
contract  is  drawn  up  and  signed  by  both  parties,  or  a  letter  or 
a  telegram  is  sent  and  the  other  party  replies  to  it,  in  which 
case  the  letter  or  the  telegram  and  the  reply  thereto  would 
constitute  the  written  contract. 

When  an  agent  is  appointed  to  vote  at  a  corporate  meet- 
ing, his  written  appointment  is  called  a  "proxy,"  and  is  usually 
signed  by  the  principal  and  by  a  witness.  Some  corporations 
require  acknowledgment  of  the  proxy  before  a  notary  public; 
but  this  is  not  usually  necessary.     (See  Chapter  CII,  Forms 

31-33) 

When  an  agent  is  appointed  to  sell  land,  or  to  perform 
any  important  act,  or  to  conduct  any  important  negotiations, 
he  is  given  formal  power  of  attorney  under  seal  (see  Form 
28).  A  power  of  attorney  is  a  particular  kind  of  written 
contract  of  agency.  Where  land  is  to  be  deeded  or  a  mortgage 
executed,  the  agent  is  called  an  attorney  in  fact  and  it  is 


1  For  forms  of  agency  contracts,  see  Chapter  CII,  Forms  26-33. 

173 


174  AGENCY 

absolutely  essential  to  have  the  formal  power  of  attorney 
executed  just  as  carefully  as  a  deed,  and  acknowledged  before 
a  notary  so  that  it  can  be  filed  in  the  registrar's  office  with 
the  deed  or  the  mortgage.     (See  §  130.) 

In  many  cases  of  agency,  the  agent  is  appointed  to  an 
office  where  he  exercises  certain  powers  without  any  formal 
specification  of  what  he  can  do  and  what  he  cannot  do.  In 
such  instances,  the  agent  will  be  held  to  have  all  the  powers 
usually  attached  to  such  an  office.  For  instance,  a  ticket-seller 
for  a  railroad  is  an  agent  of  the  company  and  has  certain  well- 
known  powers;  beyond  these  he  cannot  go. 

An  agent  appointed  to  conduct  a  given  business  for  his 
principal  has  authority  to  do  all  things  incidental  or  essential 
to  the  performance  of  his  duties  as  agent.  If  the  duties  of  the 
agent  involve  the  management  of  a  mercantile  business,  and 
it  is  necessary  to  employ  salesmen,  the  principal  will  be  bound 
for  the  salaries  whether  he  has  given  express  authority  to  the 
agent  to  employ  assistants  or  not.^ 

Notes: 

1 .  An  oral  contract  is  hard  to  prove,  and  is  liable  to  be 

misunderstood. 

2.  An  agent  should  be  appointed  by  a  written  contract 

signed  by  both  parties. 

3.  An  agent  to  sell  or  to  mortgage  land  must  be  ap- 

pointed by  a  sealed  power  of  attorney  executed 
and  filed  like  a  deed. 

4.  An  agent  conducting  business  for  his  principal  has 

the  usual  powers  of  anyone  doing  such  a  business. 

§  127.    Express  Appointment 

The  express  appointment  of  an  agent  requires  a  specific 
designation  of  the  agent  by  the  principal.     Such  an  appoint- 


*  Baldwin  v.  Garrett,  1 1 1  Ga.  876. 


THE  CONTRACT  OF  AGENCY  17^ 

ttient  consists  of  a  definite  contract  for  the  agent's  services. 
Most  agents  are  appointed  in  this  way. 

The  express  authority  of  an  agent  is  that  authority  which 
the  principal  directly  grants  to  him.  This  includes  of  necessity 
(whether  the  agency  is  general  or  special)  all  such  powers  as 
are  necessary  and  proper  as  a  means  of  effecting  the  purpose 
for  which  the  agency  was  created.' 

The  apparent  authority  of  an  agent  is  that  which  the  prin- 
cipal knowingly  permits  the  agent  to  exercise,  or  which  the 
agent  exercises  without  objection  from  the  principal. 

§  128.     Implied  Appointment 

The  appointment  of  an  agent  is  implied  when  it  is  just  to 
infer  it  from  the  circumstances.  If  A  stands  by  and  sees  B 
sell  goods  which  belong  to  A  and  makes  no  protest,  but  ac- 
quiesces, A  will  be  held  to  have  appointed  B  his  agent  and  will 
be  bound  by  B's  transactions.  This  is  also  called  "agency  by 
estoppel,"  because  A  will  be  estopped  from  denying  the  fact 
of  B's  agency  after  acquiescing  in  B's  acts  as  agent  and  per- 
mitting a  third  person  to  so  regard  him. 

When  in  the  usual  course  of  the  business  of  a  corporation 
an  officer  has  been  allowed,  in  his  official  capacity,  to  manage 
its  affairs  or  to  make  certain  contracts,  his  authority  to  repre- 
sent the  corporation  will  be  inferred  from  the  manner  in  which 
he  has  been  permitted  by  the  company  to  conduct  its  business.* 

A  wife,  as  the  domestic  manager  of  the  house,  may  buy 
all  things  that  are  naturally  and  ordinarily  necessary  for  the 
management  of  a  household.  She  may  contract  for  house- 
hold supplies,  domestic  service,  medical  attendance,  articles  of 
clothing  for  the  use  of  herself  and  children,  suitable  to  the 
style  in  which  the  husband  lives.  It  is  implied  that  she  is 
authorized  to  do  this,  and  the  husband  is  held  responsible  for 


•  Dispatch  Ptg.  Co.  v.  Nat'l  Bank,   109  Minn.  440. 

*  Martin  v.  Webb,  1 10  U.  S.  7. 


176  AGENCY 

the  cost.  She  is  not  held  to  be  authorized  beyond  this,  unless 
expressly  made  the  agent  of  the  husband  for  some  particular 
purpose,  in  the  same  manner  in  which  he  would  appoint  a 
stranger. 

Notes: 

1.  An  agent's  authority  should  be  expressed  by  a  writ- 

ten contract. 

2.  But  an  agent's  authority  may  be  implied  from  the 

conduct  of  his  principal. 

3.  An  agent  placed  in  a  position  requiring  authority 

has  implied  authority  to  do  all  things  that  are 
necessary. 

§  129.     Ratification 

Where  one  acts  as  the  agent  of  another  without  authoriza- 
tion, his  acts  as  agent  may  be  ratified  by  the  acquiescence  of 
the  principal  or  by  the  principal's  taking  the  benefit  of  the 
agent's  performance.  It  happens  not  infrequently  that  an 
agent,  appointed  for  a  definite  set  of  duties,  sees  opportunity 
to  do  something  for  which  he  has  no  authority,  but  which  will 
benefit  his  principal.  Sometimes  a  person  volunteers  to  act  as 
agent  for  a  principal  whom  he  has  not  had  opportunity  to  con- 
sult. After  an  unauthorized  act  of  this  kind  has  been  done, 
the  principal  may  (when  he  learns  of  it)  : 

1.  Refuse  to  be  bound  by  it. 

2.  Expressly  ratify  the  act. 

3.  Impliedly  ratify  it,  by  taking  the  benefit  of  the  action. 

If  the  principal  ratifies  the  unauthorized  action,  he  must 
ratify  it  as  a  whole.  He  may  not  ratify  part  of  the  agent's 
act  and  refuse  to  recognize  the  other  part. 

Ratification,  to  be  effectual,  must  be  made  with  full  knowl- 
edge of  everything  which  has  any  material  bearing  on  the 
transaction. 


THE  CONTRACT  OF  AGENCY  177 

Notes: 

1.  Ratification  has  the  same  effect  as  an  original  au- 

thorization. 

2.  Ratification  may  be  express,  or  by  acquiescence. 

3.  Taking  the  benefit  of  an  unauthorized  act   (with 

knowledge  of  the  circumstances)  is  a  ratification 
of  the  act. 


§  130.     Sealed  Contracts 

An  agent,  in  order  to  execute  a  deed  or  sealed  instrument, 
must  be  appointed  by  an  instrument  of  like  formality. 

For  most  purposes  an  agent  may  be  appointed  by  a  simple 
written  agreement  or  by  word  of  mouth;  and  sometimes  his 
authority  may  be  implied  from  circumstances.  When,  how- 
ever, land  is  to  be  conveyed  or  mortgaged,  or  some  important 
instrument  like  a  deed  or  a  mortgage  which  is  to  be  recorded 
in  some  office  of  public  registry  is  to  be  executed,  it  must  be 
done  by  the  principal  himself  or  by  an  agent  appointed  by 
power  of  attorney  executed  with  all  the  formalities  of  a  deed 
or  instrument  for  record,  which  must  be  filed  in  the  same  office 
of  public  registry  as  the  deed  itself.  An  agent  appointed  by 
a  power  of  attorney  is  called  an  "attorney  in  fact." 

The  most  important  feature  of  a  deed  is  the  fact  that  it  is 
executed  under  seal.  It  is  usually  witnessed  and  is  then  ac- 
knowledged before  a  notary  public.  The  power  of  attorney 
requires  the  formal  execution  and  the  same  acknowledgment 
that  a  deed  would  require.  The  doctrine  may  be  summarized 
thus:  An  agent  to  contract  under  seal  must  be  appointed 
under  seal. 

Authority  under  seal  is  necessary  to  enable  an  agent  to 
bind  his  principal  by  a  deed  or  other  instrument  under  seal. 
It  is  a  technical,  but  a  thoroughly  settled  rule  of  the  common 
law,  that  an  agent  cannot  bind  a  principal  by  a  deed  of  con- 


178  AGENCY 

veyance,  bond  or  other  instrument  under  seal,  unless  his 
authority  to  do  so  is  also  under  scal.^ 

There  is  no  doubt  about  the  general  rule  that  a  power  to 
execute  an  instrument  under  seal  must  be  conferred  by  an 
instrument  under  seal  executed  with  equal  solemnity.® 

Note: 

I.    A  deed  must  be  executed  by  the  owner  of  the  land 
or  by  his  agent  or  attorney  appointed  under  seal. 

§  131.     Appointment  of  Subagents 

Unless  expressly  or  impliedly  authorized,  an  agent  is  not 
empowered  to  appoint  a  subagent. 

When  an  agent  is  appointed,  he  is  appointed  because  the 
principal  places  special  trust  and  confidence  in  him.  It  would 
not  be  right  for  an  agent  to  have  power  to  delegate  his 
authority  to  someone  else,  whom  the  principal  might  not  care 
to  have  represent  him.  This  is  a  maxim  of  the  la^ — that 
delegated  authority  cannot  be  passed  on  to  someone  else  unless 
the  agent  has  been  expressly  authorized  to  do  so,  or  unless  it 
is  customary  in  the  particular  line  of  business. 

A  distinction  is  to  be  taken  in  this  matter  between  acts 
requiring  discretion  and  acts  that  simply  involve  some  mechan- 
ical performance.  An  agent  authorized  to  perform  some  im- 
portant work  could  employ  others  to  help  him  in  the  mechanical 
details.  If  it  were  customary,  he  could  employ  an  assistant 
superintendent  and  supervisors,  but  he  could  not  delegate  the 
active  supervision  to  someone  else. 

Notes: 

1.  An  agent  cannot  appoint  a  subagent. 

2.  If  he  attempts  to  do  so,  (i)  his  appointee  will  have 

no  power,  and  (2)  the  agent  will  be  personally 
liable  for  the  subagent's  wages. 


s  Clark  &    Skyles   on  Agency. 

•  Long  V.  Hartwell,  34  N.  J.  L.  122. 


THE  CONTRACT  OF  AGENCY  179 

§  132.     Servants  and  Employees 

An  employee  or  servant  may  also  be  an  agent  if  authorized 
to  do  business  with  third  parties. 

The  distinction  between  an  employee  or  servant  and  an 
agent  is  that  the  employee  or  servant  is  employed  to  do  certain 
things  and  has  no  relation  with  third  parties,  while  an  agent 
is  employed  to  represent  the  principal  in  dealings  with  third 
parties.  It  happens  in  many  cases  that  an  employee  is  also 
an  agent,  but  his  functions  as  an  agent  are  distinct  from  his 
functions  as  an  employee.  A  servant  employed  in  domestic 
activities  becomes  an  agent  when  he  or  she  is  authorized  to 
buy  supplies,  or  to  do  anything  else  that  involves  dealing  with 
third  parties.     (See  §  136.) 

If  a  delivery  man  has  been  in  the  habit  of  making  collec- 
tions, it  would  be  safe  to  pay  him.  If  a  package  has  been  sent 
C.  O.  D.  the  bearer  is  thereby  authorized  to  receive  the  amount. 

If  an  employer  acquiesces  in  his  employees'  acting  as  his 
agents,  he  will  be  estopped  from  denying  their  agency.  (See 
§  128.) 

Notes: 

1.  It  is  not  safe  to  deal  with  a  servant  or  an  employee 

unless  he  or  she  is  authorized  to  do  business  with 
third  parties. 

2.  It  is  not  safe  to  pay  money  to  truck  drivers,  delivery 

men,  and  errand  boys,  unless  it  is  known  that  they 
are  authorized  to  make  collections. 

§  133*    Void  Contracts  of  Agency 

Contracts  of  agency  for  an  unlawful  purpose,  as  is  the 
case  with  other  contracts  (see  §  39),  are  illegal  and  cannot  be 
enforced. 

For  example,  a  contract  to  conduct  a  gambling  establish- 
ment would  be  absolutely  void.    The  principal  could  not  com- 


l8o  AGENCY 

pel  the  agent  to  carry  out  the  contract,  and  the  agent  could  not 
collect  any  compensation  for  the  unlawful  service. 

A  contract  to  procure  an  agent  to  commit  a  positive  crime, 
to  bribe  legislators,  to  forge  a  will,  or  to  commit  a  burglary,  is 
void  absolutely  and  entirely. 

Any  contract  opposed  to  public  policy  is  void. 

Certain  things  are  said  to  be  against  public  policy.  The 
following  are  examples:  to  employ  a  lobbyist  to  influence 
legislation;  to  contract  with  a  lawyer  to  organize  a  trust  in 
restraint  of  trade ;  to  employ  a  broker  to  negotiate  a  marriage ; 
or  to  bribe  a  purchasing  agent  to  buy  from  you. 

In  any  contract  to  do  an  unlawful  act,  both  agent  and 
principal  are  liable  to  damages  and  to  criminal  prosecution.  If 
an  agent  or  an  employee  were  engaged  to  smuggle  silks,  both 
the  subordinate  and  the  principal  are  liable  to  prosecution  and 
whatever  penalties  are  imposed.  In  legitimate  business  the 
agent  acting  within  his  authority  makes  his  principal  liable  but 
does  not  make  himself  responsible.  In  any  illegal  business, 
the  responsibility  attaches  to  principal  and  agent  alike.  (See 
§  146.) 

Notes: 

1.  Any  contract  for  an  illegal  or  immoral  purpose  is 

void. 

2.  An  agent  employed  to  act  illegally  cannot  collect  any 

compensation. 

3.  In  a  contract  for  an  Illegal  or  Immoral  act,  both 

principal  and  agent  will  be  liable  to  damages  and 
to  criminal  prosecution. 


Review  Questions 

1.  How  may  an  agent  be  appointed? 

2.  What  is  necessary  to  appoint  an  agent  to  convey  land? 

3.  What  may  an  agent  do  in  the  absence  of  formal  specification? 


THE  CONTRACT  OF  AGENCY  l8l 

4.  To  what  extent  is  a  wife  the  implied  agent  of  her  husband? 

5.  How  may  a  contract  be  ratified? 

6.  Define  "power  of  attorney"  and  "attorney  in  fact." 

7.  Can  an  agent  appoint  a  subagent?     Explain  answer. 

8.  Distinguish  between  a  servant  and  an  agent. 

9.  What  contracts  of  agency  are  void? 

10.  Can  an  agent  who  collects  a  gambling  debt  recover  an  agreed 

commission? 

11.  What  is  agency  by  estoppel? 

12.  A's  wife  was  ill  and  the  family  physician  said  that  he  would 

like  to  consult  with  a  specialist.  A  said  that  he  was  willing. 
The  family  physician  called  in  the  specialist,  whose  diagnosis 
afterwards  proved  to  be  erroneous.  Later  the  specialist 
brought  suit  for  his  services,  to  which  A  made  the  defense 
that  he  did  not  employ  the  specialist,  and  that  the  diagnosis 
was  erroneous.  Can  the  specialist  recover?  Give  reason  for 
answer. 

13.  What  general  facts  are  necessary  to  validate  an  unauthorized 

assignment  by  an  agent? 

14.  Does  the  relation  of  agency  always  rest  on  consent? 

15.  In  your  state  is  there  any  provision  of  the  law  with  which  one 

must  comply  in  order  to  conduct  a  general  mercantile  or 
manufacturing  business  in  a  fixed  location  as  agent  for  an- 
other ? 


CHAPTER  XXIII 

THE  PRINCIPAL 

§  134.     Principal's  Duty  to  Agent 

The  principal's  duty  to  his  agent  is  to  pay  him  his  com- 
pensation and  proper  expenses.  The  relation  of  the  principal 
to  the  agent  is  one  of  contract.  The  agent  agrees  to  render 
services  and  the  principal  promises  to  pay  him  a  salary,  a  com- 
mission, or  a  fixed  sum.  If  no  amount  of  compensation  has 
been  fixed,  the  agent  will  be  entitled  to  whatever  his  services 
are  reasonably  worth.  Unless  provided  otherwise,  the  prin- 
cipal is  bound  to  reimburse  him  for  whatever  expenses  he  has 
properly  incurred.  The  contract  should  be  a  written  one  to 
avoid  misunderstandings  and  to  supply  evidence  of  what  the 
agreement  really  was. 

The  usual  rules  which  govern  employment  prevail  in  this 
relation.  If  the  principal  terminates  the  agency  before  the  end 
of  the  period  of  employment,  he  must  compensate  the  agent  for 
the  unexpired  term  less  any  amount  the  agent  can  secure  from 
some  other  employment.  If  the  agent  were  to  be  paid  a  com- 
mission or  a  gross  sum  and  the  principal  were  to  terminate  the 
agency  unreasonably,  the  principal  would  be  liable  to  pay 
damages  for  the  breach  of  his  contract.  If  the  agent  had 
completed  his  undertaking,  even  though  the  principal  did  not 
take  advantage  of  what  the  agent  had  done,  the  agent  neverthe- 
less would  be  entitled  to  full  payment  for  his  services. 

In  a  Missouri  case,  one  Gelatt,  a  real  estate  agent,  was 
employed  by  the  owner  of  a  business  block  to  find  a  purchaser 
for  the  property.    He  found  a  buyer,  but  the  owner  advanced 

182 


THE   PRINCIPAL  183 

the  price  and  broke  up  the  deal.    The  court  decided  that  Gelatt 
was  entitled  to  his  full  compensation.^ 

If  the  principal  makes  it  impossible  for  the  agent  to  com- 
plete the  undertaking,  he  must  compensate  the  agent. 

Note: 

I.  The  principal's  duty  to  his  agent  is  simply  to  deal 
fairly.  An  express  contract  in  writing  will  pre- 
vent misunderstanding. 

§  135.     Principal's  Duty  to  Third  Party 

If  the  principal  leads  the  third  party  to  think  that  the  agent 
has  authority  beyond  his  express  authorization,  the  principal 
will  be  bound  by  whatever  the  agent  does  in  the  exercise  of 
his  apparent  authority.  In  many  such  cases,  the  principal  be- 
comes bound,  not  by  any  positive  thing  which  he  has  said  or 
done,  but  because  of  his  acquiescence  in  what  the  agent  was 
doing,  or  his  failure  to  protest  at  the  proper  time.  In  other 
cases  the  principal  has  allowed  the  agent  to  do  certain  things 
beyond  the  latter's  authority;  and  this  has  continued  until  a 
course  of  dealing  has  become  established.  In  all  such  cases, 
third  persons  are  justified  in  assuming  that  the  agent's  ap- 
parent authority  is  real,  and  the  principal  will  be  bound. 

The  principal  Is  liable  for  all  acts  done  by  the  agent  within 
the  apparent,  as  well  as  actual,  authority  given.  (See  §  128.) 
Third  parties  dealing  with  an  agent  do  not  know  his  secret 
instructions,  and  whatever  authority  the  agent  appears  to  have 
can  be  used  by  him  to  bind  his  principal.  The  third  party 
must,  however,  (in  good  faith)  believe  that  the  agent  has  the 
authority. '^  The  agent's  own  representations  as  to  the  extent 
of  his  authority,  if  false,  will  not  bind  his  principal. 

An  agent  to  sell  goods  who  has  possessior^  and  is  in  position 
to  deliver  is  authorized  to  receive  payment;  but  if  he  is  not  in 


'  (lelatt  V.   Ridge.    177   Mo.   553. 
'Johnson  v.  Hurley,   115  Mo.  513. 


1 84  AGENCY 

possession  of  the  goods  he  is  not  authorized  to  receive  pay- 
ment. Usage  and  trade  customs  count  heavily  in  deciding 
what  constitutes  the  apparent  authority  of  an  agent. 

Notes: 

1.  When  an  agent  is  appointed,  he  is  given  as  much 

authority  as  his  position  seems  to  warrant. 

2.  Secret  instructions  or  limitations  on  the  agent's  au- 

thority do  not  bind  third  parties  unless  such  in- 
structions are  known  to  these  parties, 

§  136.     Principal's  Liability 

A  principal  is  liable  for  all  fraudulent,  negligent,  or  wrong- 
ful acts  of  his  agent  in  the  scope  of  his  employment.  If  this 
were  not  so,  it  would  be  possible  for  a  man  to  perpetrate  all 
manner  of  fraud  and  wrong,  and  to  escape  punishment  by 
employing  some  agent  of  no  repute  to  do  the  dirty  work.  A 
principal  is  liable  for  carelessness,  deceptions,  false  pretenses, 
or  wrongful  acts  of  any  kind  committed  by  the  agent  in  carry- 
ing out  the  purposes  of  his  principal. 

The  principal  is  liable  for  any  damages  to  third  persons 
arising  from  the  mistakes  or  the  negligence  of  an  agent  or  an 
employee  while  acting  in  his  service. 

In  a  case  in  Rhode  Island,  a  salesman  suspected  a  woman 
customer  of  stealing  a  package  of  spoons.  He  detained  her, 
sent  for  a  policeman,  had  her  taken  to  a  police  station  and 
searched.  She  brought  suit  against  the  firm  that  employed  the 
salesman  for  the  wrongful  arrest  and  search,  and  was  awarded 
damages.    The  court  said: 

If  in  the  performance  of  his  duty  he,  the  salesman,  mis- 
took the  occasion  for  it  or  exceeded  his  powers  or  employed 
an  improper  degree  of  compulsion,  the  mistake  and  the  ex- 
cess must  be  answered  for  by  the  master.^ 


»  Staples  V.  Schmidt,  18  R.  I.  224. 


THE  PRINCIPAL  185 

If  an  automobile  salesman  takes  out  a  machine  belonging 
to  his  employer  to  show  to  a  prospective  customer,  and  care- 
lessly runs  over  a  foot  traveler,  the  employer  will  be  respon- 
sible. If  the  salesman  takes  the  machine  out  after  hours  for 
his  own  pleasure  and  does  the  same  thing,  the  employer  will 
not  be  responsible,  because  the  accident  did  not  occur  within 
the  scope  of  the  salesman's  duties. 

Notes: 

1.  A  principal  is  responsible  for  whatever  is  done  by 

his  agent  within  the  scope  of  his  employment. 

2.  A  principal  is  not  responsible  for  the  acts  of  his 

agent  done  outside  the  scope  of  his  employment. 

§  137.    An  Undisclosed  Principal 

An  undisclosed  principal  may  take  the  benefit  of  any  con- 
tract made  by  his  agent.  As  has  been  stated,  an  agent  may 
conceal  the  fact  that  he  is  acting  for  a  principal.  In  such  a 
case,  the  agent  renders  himself  personally  liable,  but  a  princi- 
pal has  the  right  to  take  whatever  benefit  may  come  from  any 
advantageous  contract  made  by  his  agent.  The  undisclosed 
principal  is  liable  if  the  third  party  discovers  his  existence. 
With  this  liability  the  principal  has  the  right  to  take  the  benefit 
of  the  contract. 

Byington  v.  Simpson  was  a  case  in  which  a  building  con- 
tract was  signed  "J-  B.  Simpson,  Agt."  The  third  party  knew 
that  Simpson  was  in  fact  contracting  for  his  wife.  The  wife 
was  held  liable  though  her  name  was  not  mentioned.* 

The  third  party,  upon  discovery  of  an  undisclosed  principal, 
may  hold  responsible  either  the  agent  or  the  undisclosed  princi- 
pal. He  must  elect  to  hold  one  or  the  other;  he  cannot  hold 
both.    To  this  rule  there  are  the  following  exceptions: 

I.  If  the  contract  made  by  the  agent  is  in  the  form  of 
a  negotiable  instrument  or  a  sealed  contract,  the  undisclosed 

♦Byington  v.  Simpson,  134  Mass.  169. 


I 86  AGENCY 

principal  has  no  rights  or  liabiHties.  He  cannot  sue  or  be 
sued,  as  such  instruments  are  considered  as  having  been  taken 
solely  on  the  face  of  the  names  appearing  thereon. 

2.  If  the  principal,  before  his  identity  was  disclosed,  in 
good  faith  paid  the  money  due  on  the  contract  to  the  agent, 
he  cannot  be  held  liable.  This  is  perfectly  fair  to  the  third 
party  because  he  gave  credit  to  the  agent  and  expected  to  get 
payment  from  him  and  had  no  knowledge  that  there  was 
somebody  behind  the  agent.  The  third  party  may  collect  from 
the  agent  if  he  can,  but  it  would  be  unfair  to  let  him  collect 
from  the  unnamed  principal  who  in  that  case  would  have  to 
pay  a  second  time. 

3.  If  the  third  party  after  learning  that  there  is  a  certain 
principal,  unequivocally  chooses  to  hold  the  agent,  he  cannot 
alter  his  decision  and  proceed  against  the  principal. 

4.  If  the  contract  states  clearly  that  it  is  made  only  by 
the  parties  signing  and  that  no  other  parties  are  to  be  intro- 
duced into  the  contract,  the  undisclosed  principal  rule  would 
not  apply. 

Notes: 

1.  The  agent  who  does  not  disclose  his  principal  takes 

the  entire  responsibility  on  himself. 

2.  The  undisclosed  principal  is  liable  when  discovered. 


Review  Questions 

1.  What  are  the  duties  of  a  principal  to  his  agent? 

2.  What  rules  usually  prevail  in  the  relation  between  agent  and 

principal  ? 

3.  For  what  acts  of  the  agent  is  the  principal  responsible? 

4.  What  does  the  "scope  of  employment"  mean? 

5.  Do  false  representations  of  an  agent  in  the  "scope  of  his  employ- 

ment" bind  the  principal? 

6.  What  is  an  undisclosed  principal  ?    What  risk  does  his  agent  take? 


THE  PRINCIPAL  1 87 

What   may   a   third   party   do   on   discovery   of   an   undisclosed 

principal  ? 
May  the  principal  benefit  by  any  transaction  in  which  the  agent 

conceals  the  fact  that  there  is  a  principal? 
What  is  the  rule  as  to  an  undisclosed  principal  in  the  case  of  a 

sealed  instrument  or  negotiable  paper? 


CHAPTER  XXIV 

THE  AGENT 

§  138.     Agent's  Duty  to  Principal 

An  agent  is,  in  the  line  of  his  duties,  subordinate  to  his 
principal.  Therefore,  it  is  an  essential  feature  of  his  employ- 
ment that  he  should  obey  orders,  act  with  good  faith,  and  use 
such  prudence,  skill,  and  diligence  in  his  duties  as  are  requisite 
for  their  proper  discharge.  He  must,  if  necessary,  keep  proper 
accounts  and  render  staternents  to  his  principal.  He  cannot 
delegate  any  duty  demanding  discretion  to  others  without 
special  authority.  H  he  does  not  do  all  this,  if  he  fails  in  his 
duty,  he  may  be  discharged,  his  compensation  may  be  denied, 
and  he  may  be  responsible  in  damages. 

Any  profits  made  in  the  course  of  an  agent's  employment 
belong  entirely  to  his  principal.  An  agent  may  not  use  his 
agency  for  his  own  advantage. 

One  Cummings,  an  agent  for  the  sale  of  stock  for  the 
Diamond  Match  Company,  sold  stock  of  the  company  amount- 
ing at  par  to  $170,000  for  $200,000,  and  kept  the  profit  of 
$30,000  for  himself.  Later  this  was  discovered  by  the  com- 
pany, which  brought  suit  and  recovered  the  whole  amount.^ 

In  making  a  contract  with  an  agent  or  confidential  em- 
ployee, it  is  safest  to  contract  that  he  shall  not  at  any  time, 
either  while  he  is  employed  or  thereafter,  reveal  or  use  for  the 
benefit  of  others  any  special  information,  secret  processes,  lists 
of  customers,  or  other  private  matters  that  may  be  learned  in 
the  course  of  his  duty.  The  courts  will  protect  such  an  agree- 
ment. 


1  Graham  v.  Cummings,  208  Pa.  St.  516. 

188 


THE  AGENT  189 

In  a  Michigan  case,  a  party  employed  in  a  manufactory  of 
fly  paper,  under  contract  not  to  use  methods  elsewhere,  after 
severing  his  connection  with  the  factory,  made  plans  to  give 
others  the  benefit  of  his  information.  The  court  granted  an 
injunction  to  prevent  him  from  revealing  the  processes.^ 

Where  a  salesman  or  solicitor  is  employed  to  work  up 
trade,  he  necessarily  becomes  familiar  with  the  list  of  cus- 
tomers. In  such  a  case,  a  contract  with  an  agent  that  he  shall 
not,  for  a  period  of  years,  engage  with  any  other  house  in 
the  same  line  doing  business  in  the  same  territory,  will  be  sus- 
tained by  the  courts. 

What  is  here  said  as  to  the  duty  of  the  agent  refers  to  a 
general  agency,  where  the  agent  gives  his  entire  services  to 
one  principal.  In  cases  of  special  agency,  what  is  said  of  the 
agent's  duty  applies  only  so  far  as  is  necessary  to  effect  the 
object  of  the  agency.  A  bank  may  be  an  agent  to  collect  a 
draft,  but  is  not  called  upon  to  exercise  general  obedience, 
loyalty,  etc. 

Notes: 

1.  A  general  agent  must  be  obedient,  loyal,  careful, 

skilful,  honest,  and  of  good  habits. 

2.  A  special  agent  is  required  to  exercise  only  such 

qualities  as  are  requisite  to  effect  the  purpose  of 
his  agency. 

§  139.    Agent's  Obedience 

Disobedience  is  good  cause  for  discharge  or  refusal  to 
compensate  an  agent,  and  renders  him  liable  for  any  resulting 
damage.  It  is  an  agent's  duty  to  obey  orders ;  and  by  so  doing 
he  relieves  himself  of  any  responsibility  in  case  of  misadven- 
ture. 

If,  however,  circumstances  should  arise  which  make  it 


*  Thurm  Company  v.  Tloczynski,   1 14  Mich.  149. 


ipo  AGENCY 

necessary  to  act  contrary  to  the  instructions  he  has  received, 
it  is  his  duty  to  do  this,  provided,  of  course,  that  it  is  impos- 
sible to  consult  his  principal  before  acting.  Emergencies  may 
occur  where  it  is  the  duty  of  the  agent  to  do  the  best  thing 
possible,  even  though  it  involves  his  disregarding  orders. 
Where  no  emergency  exists,  however,  the  agent  violates  his 
directions  at  his  own  risk.  It  is  the  principal's  right  to  decide 
how  he  wishes  his  matters  attended  to;  and  if  the  agent  obeys 
and  loss  ensues,  it  is  the  loss  of  the  principal.  If  a  shipping 
agent  or  railroad  varies  directions  that  goods  are  to  go  over 
some  particular  line,  the  agent  or  the  railroad  incurs  the 
liability  of  an  insurer. 

An  agent  who  has  been  instructed  to  sell  for  cash  has  no 
authority  to  allow  credit.  If  he  gives  credit  and  loss  ensues, 
he  is  responsible.  If  he  is  authorized  to  buy  or  to  sell  at  a 
certain  price,  he  may  not  go  beyond  this.  This  is  not  to  be 
understood  as  prohibiting  trifling  departures  and  immaterial 
variations  from  exact  instructions.  The  law  does  not  regard 
negligible  things. 

An  agent  who  is  instructed  to  ship  goods  or  to  remit  money 
in  a  particular  way  must  obey  his  instructions  to  the  letter. 

Notes: 

1.  An  agent  must  obey  orders  if  he  does  not  want  to 

make  himself  liable. 

2.  When  an  emergency  exists  he  may  act  contrary  to 

instructions. 

3.  A  principal  should,  where   possible,   give   explicit 

orders  to  his  agent 

§  140.     Agent's  Good  Faith 

Good  faith  is  essential  on  the  part  of  anyone  acting  in  the 
capacity  of  agent.  If  an  agent  is  found  to  be  working  for  his 
own  interests  as  opposed  to  those  of  his  employer,  he  may  be 
discharged  summarily.    If  he  makes  false  reports  or  deceives 


THE  AGENT  191 

his  employer,  or  defrauds  him  in  any  way,  he  may  be  dis- 
charged ;  and  he  will  have  forfeited  any  claim  to  compensation. 
If  he  learns  of  anything  in  the  line  of  his  business  to  the 
principal's  advantage,  it  is  his  duty  to  let  his  principal  know 
and  have  the  benefit  of  it. 

A  broker,  in  a  Michigan  case,  sold  land  to  a  party  whom 
the  owner  had  previously  excepted  from  those  to  whom  the 
liroker  might  sell.  It  was  held  that  the  latter  was  not  entitled 
to  commission.^ 

In  a  Massachusetts  case,  an  agent  made  a  sale  of  some 
property,  and  in  rendering  the  account  to  his  employer  charged 
him  $50  as  paid  to  an  attorney  for  examining  the  title,  whereas 
he  really  paid  only  $25.  The  court  held  that  he  lost  his  right 
to  commission.* 

The  Agent  Must  Not  Act  for  Both  Parties.  An  agent  may 
not  represent  both  parties  to  a  transaction.  He  may  not  earn 
a  commission  from  both  buyer  and  seller.  This  is  a  rule  that 
holds  good  everywhere.  But  it  is  said  that  a  double  agency 
may  be  valid  where  both  parties  know  of  the  double  agency 
and  agree  to  it ;  it  is  then  understood  that  the  agency  requires 
no  independent  discretion. 

The  Agent  Must  Not  Act  for  Himself.  If  the  agent  is 
employed  by  a  principal  to  manage  his  business,  what  he  does 
is  done  for  the  principal.  It  is  not  right  for  the  agent  to  be 
interested  adversely ;  and  all  the  profits  that  are  made  in  con- 
nection with  the  principal's  business  belong  to  the  principal, 
unless  he  has  previously  agreed  to  give  the  agent  a  share  of 
the  profits  as  part  or  all  of  his  compensation. 

If  the  agent  in  the  course  of  acting  for  his  principal  obtains 
any  particular  advantage  to  himself,  and  the  principal  dis- 
covers it,  the  latter  can  hold  the  agent  accountable  for  the 
profits  or  the  property  so  obtained. 


*  Ranney  v.  Henry,  i6o  Mich.  597. 

*  Little  V.  Phipps  et  al.,  208  Mass.  331. 


192  AGENCY 

An  Agent  Must  Not  Compete  With  His  Principal.  An 
agent  must  not  be  interested  adversely  to  his  principal. 
Neither  may  he  represent  and  sell  goods  for  a  competitor  of 
his  principal.  An  employer  has  a  right  to  his  agent's  absolute 
loyalty.  If  an  agent  uses  his  knowledge  of  his  principal's 
affairs  to  secure  an  advantage  for  himself,  the  courts  will 
compel  him  to  make  restitution.  The  law  moves  on  a  high 
plane  in  matters  of  this  kind. 

The  Agent  Must  Be  of  Good  Habits.  Any  habits  which 
interfere  with  the  proper  discharge  of  the  agent's  duty  are 
sufficient  reason  for  his  discharge.  Drunkenness  in  the  day- 
time or  while  attending  to  business  is  undoubtedly  sufficient 
reason  for  dismissal.  As  in  the  case  of  other  employees,  the 
circumstances  must  be  considered. 

Generally  speaking,  an  agent  may  be  discharged  for  drunk- 
enness, gambling,  or  licentiousness.  Possibly,  the  courts  would 
not  in  all  cases  justify  too  close  an  inquisition  into  the  private 
habits  of  employees.  A  bank,  however,  employs  detectives; 
and  if  an  employee  indulges  in  loose  living  he  is  discharged 
and  has  no  recourse.  Usually  an  agent  who  is  discharged  for 
any  reason  of  this  kind  cannot  afford  to  risk  the  notoriety 
involved  in  an  attempt  to  hold  his  employer  for  damages. 

Non-Payment  No  Excuse  for  Non-Performance.  The 
fact  that  the  agent  is  unpaid  does  not  affect  his  responsibility. 
The  agent's  liability  does  not  depend  upon  how  well  he  is  paid 
for  what  he  does,  or  whether  he  is  paid  at  all ;  for,  if  he  under- 
takes to  do  anything  for  another,  he  must  do  it  well ;  and  he 
is  responsible  in  case  of  bad  faith,  negligence,  or  lack  of  skill. 

Notes: 

1.  The  doctrine  of  the  law  on  the  subject  of  the  agent's 

good  faith  is  on  an  exceptionally  high  plane. 

2.  The  agent  must  not  act  as  the  agent  of  both  parties 

unless  both  know  of  and  agree  to  it. 


THE  AGENT  1 93 

3.  The  agent  must  not  act  for  himself  in  the  principal's 

affairs. 

4.  The  agent  must  not  compete  with  his  principal. 

5.  The  agent  must  be  of  good  habits. 

§  141.    Agent's  Care,  Skill,  and  Diligence 

If  anyone  undertakes  the  duties  of  an  agent,  he  is  assumed 
to  have  the  necessary  skill  and  ability  to  perform  the  said 
duties.  In  all  matters  connected  with  his  agency,  he  is  ex- 
pected to  act  as  an  ordinarily  prudent,  careful  business  man 
would  act  in  the  conduct  of  his  own  affairs.  If  the  agent  is 
a  lawyer,  he  undertakes  to  have  professional  ability  to  repre- 
sent his  client  in  an  adequate  manner.  If  he  is  a  financial  agent 
and  invests  his  client's  funds  imprudently,  he  is  responsible. 

The  rule  is  well  settled  that  an  agent  is  not  only  bound 
to  act  in  good  faith,  but  to  exercise  reasonable  diligence,  and 
such  care  and  skill  as  are  ordinarily  possessed  by  persons  of 
common  capacity  engaged  in  the  same  business.*^ 

A  firm  engaged  ai£  insurance  brokers,  if  it  takes  out  poli- 
cies for  its  clients  in  irresponsible  companies,  will,  in  event 
of  loss,  be  required  to  make  good  the  damage  resulting  from 
its  neglect  to  use  proper  care." 

Custody  of  Funds.  It  is  the  duty  of  the  agent  to  account 
for  all  funds  and  property  of  the  principal  which  come  into 
his  possession.  In  this  particular  he  must  obey  the  rules  that 
govern  one  person  who  holds  the  property  of  another. 

The  agent  should  not  deposit  funds  belonging  to  his  prin- 
cipal to  his  own  bank  account;  but  should  open  a  separate 
account  in  the  name  of  his  principal,  or  in  his  own  name  as 
agent.  If  he  does  this,  he  is  not  responsible  in  the  event  of 
the  bank's  failure  and  the  loss  of  part  or  all  of  the  funds.  In 
the  same  way,  it  is  his  duty  to  turn  all  money  and  other 

»  Whitney  v.  Martine,  88  N.  Y.  S3S- 

•  Sheppard  v.  Davis,  42  A.  D.   (N.  Y.)  462. 


194  AGENCY 

property  in  his  possession  over  to  the  principal  or  to  the 
principal's  order. 

Any  money  held  by  an  agent  for  his  principal  is  a  trust 
fund. 

In  an  Indiana  case  the  judge  said: 

In  case  it  becomes  the  duty  of  an  agent  or  a  trustee  to 
deposit  money  belonging  to  his  principal,  he  can  escape  risk 
by  making  the  deposit  in  his  principal's  name;  or  by  so  dis- 
tinguishing it  on  the  books  of  the  bank  as  to  indicate  in  some 
way  that  it  is  the  principal's  money.  If  he  deposits  it  in  his 
own  name,  he  will  not,  in  case  of  loss,  be  permitted  to  throw 
the  loss  on  his  principal.^ 

Notes: 

1.  The  theory  of  the  law  in  these  matters  is  better  than 

the  results  in  actual  practice.  It  is  in  most  cases 
impossible  to  obtain  legal  redress  for  the  common 
lack  of  care,  skill,  and  diligence  in  agents. 

2.  In  all  matters  relating  to  the  care  and  the  custody  of 

money  belonging  to  others,  too  great  care  cannot 
be  exercised. 

3.  The  treasurers  of  clubs,  informal  organizations,  and 

unincorporated  associations,  should  observe  the 
rules  that  have  been  given  for  agents  in  charge  of 
funds. 

§  142.    The  Agent's  Signature 

The  agent  is  acting  for  the  principal,  therefore  when  he 
signs  a  contract  he  should  sign  the  principal's  name,  followed 
with  his  own  in  this  form :  "By  Henry  Parker,  Agent."  When 
there  is  a  regular  course  of  business,  a  rubber  stamp  will  prob- 
ably be  used  with  a  blank  for  the  written  signature  of  the 
agent,  as  follows:  "George  Wayman,  By ,  Agent."    Such 


*  Waltner  v.  Dolan,  108  Ind.  500. 


THE  AGENT  195 

a  signature  is  safe  and  in  no  case  can  it  bind  the  agent  per- 
sonally. 

A  corporation  can  act  only  by  its  agents.  The  rule  as 
to  the  signature  of  contracts  is  the  same  and  the  name  of  the 
corporation  followed  by  the  name  of  the  officer  signing  is  the 
proper  form.  Letters  are  often  signed  by  the  officer,  as  "James 
Haywood,  President,"  the  letterhead  showing  the  name  of 
the  corporation  and  that  the  individual  signing  holds  the  office 
he  claims. 

The  better  practice  is  to  have  the  full  corporation  signature : 

Edgemont  Water  Company, 

By  Harvey  Gray,  Treasurer. 

Where  notes  or  other  negotiable  papers  are  to  be  signed 
by  the  agent  for  a  corporation  or  other  principal,  it  is  not  safe 
to  sign  except  in  the  approved  form,  the  principal's  name  in 

full  followed  with  "By  ,  Agent."    Any  other  signature 

may  not  only  fail  to  bind  the  corporation  or  other  principal  but 
may  involve  the  officer  or  agent  in  a  personal  liability  as  maker 
or  indorser. 

§  143.    Agent's  Duty  to  Third  Party 

Observance  of  the  usual  rules  of  fair  dealing  and  honest 
treatment  is  the  only  duty  owed  by  the  agent  to  the  third  party. 
The  agent  is  the  representative  of  his  principal,  and  is  to  work 
in  the  interests  of  his  principal.  If  he  resorts  to  trickery  or 
fraud,  he  himself  is  liable  for  any  damages  caused  to  the  third 
party.  An  agent  cannot  be  held  for  a  legitimate  business  con- 
tract within  the  scope  of  his  authority.  He  binds  his  principal, 
not  himself.  But  his  principal  cannot  authorize  him  to  do 
wrong;  and  if  he  does  wrong  both  he  and  his  principal  are 
held. 

The  agent  may  legally  do  whatever  the  law  allows  his 
principal  to  do.    The  law  is  not  at  its  best  when  it  defines  the 


196  AGENCY 

rights  of  buyer  and  seller.  The  better  business  houses,  in  their 
actual  practice,  act  on  a  plane  far  higher  than  that  which  the 
law  compels.  In  other  words,  good  business  prescribes  a  much 
higher  standard  of  morality  in  the  matter  of  sales  than  does 
the  law. 

On  this  account  the  standards  of  good  business  are  given 
here,  rather  than  the  legal  requirements.  Let  your  dealings  be 
characterized  by  fairness  and  liberal  treatment.  Deal  with  the 
third  party  in  such  a  manner  that  you  can  deal  with  him  again. 
All  good  and  permanent  business  is  to  the  advantage  of  both 
parties.  Make  every  customer  a  lasting  business  friend.  Treat 
him  as  you  would  like  to  have  him  treat  you  in  a  like  case. 

Note: 

I.  If  an  agent  has  a  principal  who  does  not  believe  in 
the  above  standard  of  good  business,  he  had  better 
look  for  another  job. 

§  144.     Limitation  of  Agent's  Authority 

The  agent  rarely  has  unlimited  authority.  In  established 
positions,  such  as  that  of  a  bank  cashier,  a  railroad  conductor, 
or  a  retail  salesman,  the  duties  are  settled  and  the  authority 
of  the  incumbent  is  known  to  his  principal,  to  those  he  deals 
with,  and  to  himself.  Usually  an  agent  in  such  a  position 
keeps  to  his  routine,  and  his  powers  are  entirely  familiar  to 
all  concerned. 

As  between  his  principal  and  himself,  the  agent's  authority 
is  limited :  ( i )  by  the  limitations  usual  to  the  employment,  and 
(2)  by  the  limitations  expressed  in  the  agreement.  If  he  ex- 
ceeds these  limitations,  he  may  be  discharged  from  his  position, 
and  may  be  held  for  damages  if  he  is  responsible. 

In  dealing  with  third  parties,  the  agent,  in  all  those  cases 
where  his  apparent  authority  exceeds  his  real  authority,  may 
bind  his  principal.  In  such  an  event,  the  agent  must  answer 
to  his  principal  for  his  abuse  of  authority. 


THE  AGENT  197 

Notes: 

1.  An  agent  has  the  usual  authority  pertaining  to  his 

position,  unless  restricted  by  special  agreement. 

2.  An  agent  has  always  such  authority  as  his  agreement 

with  his  principal  permits. 

3.  An  agent  may  bind  his  principal  wrongfully  when 

his  apparent  authority  exceeds  his  real  authorit3^ 

§  145.    Agent's  Fraudulent  Conduct 

The  question  of  the  agent's  bad  faith  to  his  principal  has 
already  been  discussed.  If  he  perpetrates  a  fraud  on  a  third 
party  while  transacting  his  principal's  business,  both  principal 
and  agent  are  liable.  The  agent  will  not  be  able  to  shift  re- 
sponsibility to  his  principal.  A  principal  cannot  authorize  his 
agent  to  commit  fraud. 

In  Weber  v.  Weber,  the  action  was  against  Caroline  Weber 
for  stating  positively  that  there  was  no  mortgage  on  a  piece 
of  land  which  she  was  selling  as  the  agent  of  her  husband. 
The  court  said: 

All  persons  who  are  active  in  defrauding  others  are  liable 
for  what  they  do,  whether  they  act  in  one  capacity  or  an- 
other.* 

In  a  case  where  the  president  of  a  medical  institute  was 
made  a  party  defendant  in  a  proceeding  against  the  institution 
for  defrauding  a  patient,  the  judge  said : 

We  are  not  aware  of  any  rule  of  law  which  will  excuse 
and  absolve  a  person  from  the  consequence  of  his  own  wrong 
doing,  because  he  happened  to  be  the  agent  of  another  at  the 
time  of  the  perpetration  of  the  wrong.^ 

Notes: 

I.     An  agent  cannot  use  his  agency  to  protect  him  in 
doing  wrong. 


•  Weber  v.  Weber,  47  Mich.  569. 

*  Hedin  y.  MinneapoUs  Medical  Institute,  62  Minn.  146. 


1 98  AGENCY 

2.     In  case  of  fraud  or  misrepresentation,  the  agent  as 
well  as  the  principal  is  liable  to  the  person  injured. 

§  146.    Agent's  Liability 

The  agent  makes  himself  liable  with  his  principal,  as  we 
have  seen,  when  he  is  guilty  of  any  fraudulent  conduct. 

Where  the  business  is  illegal,  the  agent  is  liable  with  the 
principal. 

He  also  makes  himself  liable  when  he  exceeds  his  authority, 
unless  the  third  party  knows  the  nature  of  the  agent's  action. 

In  most  cases  where  an  agent  deals  with  third  parties,  the 
third  parties  depend  upon  the  agent  to  inform  them  correctly 
as  to  the  extent  of  his  authority.  If  the  agent  deceives  them 
as  to  this,  he  makes  himself  personally  liable  to  the  third  party 
to  the  same  extent  that  he  would  be  had  he  made  the  contract 
in  his  own  name  instead  of  that  of  his  principal. 

One  Kroeger  insured  his  premises  through  Pitcairn,  an 
agent,  who  told  Kroeger  that  he  could  keep  a  small  amount 
of  gasoline  on  the  premises  without  making  his  policy  void. 
Pitcairn  had  no  authority  to  do  this.  The  premises  were 
burned,  and  Kroeger  could  not  recover  from  the  insurance 
company  on  account  of  the  storage  of  gasoline.  The  court  did, 
however,  allow  him  to  recover  his  damages  from  Pitcairn.^" 

If  the  agent  has  apparent  authority  but  is  limited  by  pri- 
vate instructions  from  his  principal,  he  can  nevertheless  bind 
his  principal  by  his  contract  within  the  scope  of  his  apparent 
authority.  In  such  a  case,  he  is  liable  to  his  principal  for  any 
unwarranted  action. 

It  happens  sometimes  that  an  agent  deals  with  third  parties 
and  assumes  to  be  the  principal;  i.e.,  he  does  not  represent 
himself  to  be  an  agent,  or  disclose  the  fact  that  he  is  acting  for 
someone  else.  In  such  a  case  he  will  be  held  personally,  as 
though  he  were  the  principal.    This  is  plainly  just  and  right. 

*•  Kroeger  v.  Pitcairn,  101  Pa.  St.  311. 


THE  AGENT  1 99 

Where  an  agent  represents  a  principal  who  is  non-existent 
or  irresponsible,  he  binds  himself.  On  occasion  agents  have 
represented  themselves  as  having  a  principal  who  did  not  exist 
— in  such  cases  they  bind  themselves.  Thus,  parties  acting  as 
directors  in  a  non-existent  corporation  may  be  held. 

If  an  agent  represents  any  irresponsible  body,  such  as  a 
social  club,  a  meeting,  or  any  informal  organization,  he  will  in 
all  such  cases  render  himself  liable.  If  the  agent  is  authorized 
by  a  motion,  all  members  who  voted  for  the  motion  are  liable, 
and  those  who  are  forced  to  pay  can  hold  for  contributions  all 
others  who  joined  in  authorizing  the  expense.^^ 

The  Northeastern  Pigeon  &  Bantam  Society,  a  voluntary 
association,  held  an  exhibition  of  fancy  stock  and  offered 
premiums.  The  expense  exceeded  the  receipts.  The  court 
held  that  those  members  who  paid  the  loss  could  bring  suit  to 
compel  all  tlie  other  members  who  had  voted  to  hold  the  ex- 
hibition to  pay  their  pro  rata.^* 

A  common  case  under  this  general  head  is  that  of  a  pro- 
moter who  incurs  liabilities  for  a  corporation  before  it  is  in- 
corporated. Until  the  corporation  has  come  into  being,  it 
cannot  appoint  an  agent ;  therefore  the  general  rule  is  that  the 
corporation  cannot  be  bound,  and  that  those  who  deal  with  the 
promoter  must  look  to  him  for  compensation. 

The  general  doctrine  that  no  one  is  authorized  to  contract 
for  a  corporation  before  it  is  formed,  applies  to  all  contracts 
with  and  by  promoters.  The  promoter  himself  is  liable  on 
these  pre-corporate  contracts,  unless  otherwise  expressly 
provided ;  but  the  corporation  is  not.^' 

Where  an  agent  commits  an  assault  in  the  discharge  of  his 
duty,  he  may  be  held  responsible. 

The  agent  in  charge  of  the  grounds  of  a  fishing  club  in 


'*  Lewis  V.  Tilton,  64  Iowa  220. 
"Ray  V.  Powers,  134  Mass.  22. 
"Conyngton's  "Corporate  Organization  and  Management"  (Edition  of  1917)1  I  3** 


200  AGENCY 

Kentucky,  assailed  a  party  whom  he  accused  of  trespassing. 
The  party  assaulted  brought  suit  for  damages  against  the  agent 
and  the  club,  and  got  judgment  against  both," 

If  the  agent  got  into  a  quarrel  independently,  and  not  in 
the  discharge  of  his  duty,  his  principal  would  not  be  affected. 

Sometimes,  even  when  the  agent  acts  in  entire  good  faith, 
he  may  become  personally  liable  for  his  blunders.  For  in- 
stance : 

In  a  California  case,  Wilson,  a  broker,  sold  some  mining 
stock  for  a  customer.  The  stock  turned  out  to  have  been 
stolen  from  a  party  named  Swim,  who  brought  suit  against 
Wilson  for  the  value  of  the  stock.  The  court  held  that  the 
principal  who  employed  Wilson  to  sell  the  stock  had  no  title 
and  could  give  none  to  Wilson,  who  was  therefore  compelled 
to  pay  the  value  of  the  stock.^** 

Notes: 

1.  An  agent  is  liable  for  fraudulent  conduct. 

2.  An  agent  is  liable  for  exceeding  his  authority. 

3.  An  agent  is  liable  if  he  does  not  disclose  his  prin- 

cipal. 

4.  An  agent  is  liable  if  he  represents  a  non-existent  or 

irresponsible  principal. 

5.  An  agent  is  liable  for  wrongful  acts  within  the  scope 

of  his  employment. 

6.  An  agent  may  be  liable  for  blunders. 


Review  Questions 

1.  What  are  the  general  duties  of  an  agent  to  his  principal? 

2.  Can  C,  an  agent,  in  the  course  of  his  duties  make  any  profit 

for  himself? 

3.  When  may  an  agent  disobey  orders? 

4.  A  refuses  to  pay  B  commissions  for  sale  of  stock  on  the  ground 


"New  Ellerslie  Fishing  Club  v.  Stewart,   123  Ky.  8. 
"Swim  V.  Wilson,  13  Cal.  126. 


THE  AGENT  20i 

that  B  received  commissions  from  the  parties  who  bought 
the  stock.  B  proved  that  A  knew  at  the  time  that  B  was  also 
being  paid  by  the  buyers.     Must  A  pay? 

5.  If  an  agent  has  not  been  paid  promptly,  can  he  collect  money 

due  his  principal  and  pay  himself? 

6.  May  a  lawyer  act  for  both  sides  in  a  controversy?    How  would 

it  be  in  negotiating  a  contract? 

7.  If  money  ot  the  principal  is  deposited  by  an  agent  in  his  own 

name,  can  the  agent's  creditors  take  it? 

8.  Is  an  agent  liable  for  money  of  his  principal  if  he  put  it  in  his 

own  cash  drawer  over  night  and  it  is  stolen?  If  he  puts 
it  in  a  bank  in  his  own  name  with  a  designation  "Agent's 
Name,  No.  2,"  to  distinguish  it  from  his  own  personal  account, 
and  the  bank   fails? 

9.  How  should  an  agent  execute  negotiable  paper  in  order  that 

it  may  be  binding  on  his  principal  and  not  upon  himself? 
ID.     What  do  you  understand  by  the  "apparent  authority"  of  an 
agent  ? 

11.  A   was   a  cashier   of   the   Second   National   Bank.     B   was   a 

depositor  therein,  and  was  on  his  way  to  the  bank  one  day 
to  make  a  deposit.  When  about  half  way  to  the  bank  he  met 
the  cashier,  stopped  him,  told  him  that  he  was  about  to  make 
the  deposit,  and  asked  him  if  he  would  take  the  money,  there. 
The  cashier  agreed,  took  the  money,  made  the  proper  entry  in 
the  deposit  book,  and  handed  it  back  to  B.  A,  the  cashier,  how- 
ever, did  not  put  the  money  to  B's  credit,  but  kept  it  and  con- 
verted it  to  his  own  use,  and  B  sued  the  bank  for  the  amount. 
Is  he,  or  is  he  not,  entitled  to  recover?  Did  the  cashier  have 
any  apparent  or  real  authority  to  receive  the  deposit? 

12.  When  may  the  members  of  an  unincorporated  club  be  held  for 

an  agent's  acts? 

13.  When  is  an  agent  personally  liable  to  third  persons? 

14.  What  is  the  agent's  liability  on  promissory  notes  signed? 

(a)  A,  by  B,  Agent 

(b)  B,  Agent  for  A 

(c)  B,  Agent  of  A 

(d)  B,  as  Agent 

(e)  X  Y  Company,  by  A.  President 

15.  Can  a  corporation  be  bound  by  contracts  made  before  it  was 

organized  ? 


CHAPTER  XXV 

THE  THIRD  PARTY 

§  147.     Third  Party's  Relation  to  Agent 

Strictly  speaking,  the  third  party  has  no  relation  to  the 
agent.  The  agent  represents  the  principal,  and  the  third  party 
is  dealing  only  with  the  principal.  When  the  agent  goes  be- 
yond his  powers,  then  he  makes  himself  responsible  and  may 
be  held;  the  same  is  true  when  he  represents  an  undisclosed 
principal,  or  a  fictitious  principal.  The  third  party  should 
know  that  the  agent  with  whom  he  is  dealing  has  authority 
to  represent  his  principal,  and  how  far  this  authority  justifies 
the  action  of  the  agent. 

A  third  party  dealing  with  an  agent  in  excess  of  his  author- 
ity does  so  at  his  own  risk.  It  is  obvious  that  an  agent  cannot 
go  beyond  his  authority.  He  is  authorized  for  such  general 
or  special  purposes  as  the  principal  indicates,  and  further  than 
this  he  may  not  go. 

Where  an  agent  is  empowered  by  a  written  instrument  to 
do  certain  things,  it  is  very  plain  that  he  has  no  authority  to  do 
anything  more  than  what  is  specified ;  but,  as  in  most  cases  of 
general  agency  the  agent  has  the  right  to  do  everything  inci- 
dental to  his  main  agency  business,  it  is  sometimes  not  easy 
to  tell  what  is  in  excess  of  his  authority  and  what  he  has  the 
right  to  do. 

Law  sold  goods  amounting  to  $320  to  Stokes.  The  sale 
was  made  by  Sheridan,  Law's  salesman.  The  sale  was  on  a 
credit  till  the  end  of  the  month.  Next  day  the  goods  were 
shipped  and  a  bill  was  enclosed  in  a  letter.    The  letter,  signed 

202 


THE  THIRD  PARTY  203 

by  Law,  said,  "Please  remit  amount  direct  to  me."  The  bill 
had  on  its  face  in  red  ink,  "All  remittances  on  account,  or  in 
settlement  of  bills,  must  be  made  direct  to  the  principal." 
About  a  month  later  Stokes  paid  Sheridan  the  amount  of  the 
bill.  Sheridan  absconded  with  the  money;  Law  brought  suit 
and  obtained  judgment.^ 

In  this  case  the  salesman  had  no  authority  to  collect.  The 
case  was  clear  for  the  plaintiff,  Law,  because  he  had  given 
notice  on  his  billhead  and  in  his  letter  of  his  limitation  on  the 
salesman's  authority.  Usually  there  would  be  more  trouble 
in  a  case  of  this  kind  because  the  proof  would  not  be  so  clear. 
The  agent  himself  would  be  liable  to  suit  by  the  third  party ; 
but  in  such  a  case  the  probability  would  be  that  the  agent  was 
judgment-proof  or  had  left  for  fresh  fields  and  pastures  new. 

In  each  case  the  third  party  should  know  for  his  own  safety 
just  what  power  the  agent  has  to  bind  his  principal,  and  that 
the  principal  is  responsible.  He  cannot  always  rely  on  the 
representations  of  the  agent  himself  as  to  the  extent  of  his 
authority.  It  is  the  third  party's  duty  to  make  due  inquiry 
into  the  matter,  as  in  case  of  a  dispute  later  the  burden  of 
proof  is  on  the  third  party  to  show  that  the  agent  had  authority 
for  the  particular  act. 

Notes: 

1.  It  is  unsafe  for  a  third  party  to  deal  with  an  agent 

without  sufficient  information  as  to  his  authority. 

2.  Care  should  be  taken  never  to  make  payments  to  an 

unauthorized  agent. 

3.  Where  salesmen  are  not  expected  to  collect  payment, 

customers  should  be  informed  of  the  fact. 

4.  In  dealing  with  an  agent,  it  is  necessary  to  know 

whom  he  represents  and  how  far  his  authority 
extends. 


>  Law  V.  Stokes,  32  N.  J.  L.  249. 


204  AGENCY 

§  148.     Third  Party's  Relation  to  the  Principal 

The  third  party  is  really  dealing  with  the  principal,  and  the 
agent  is  merely  the  means  of  communication.  When  the  con- 
tract is  signed,  the  name  of  the  agent  is  attached  as  agent,  and 
the  principal,  not  the  agent,  is  bound.  Therefore  the  relation 
between  the  third  party  and  the  principal  is  the  same  as  be- 
tween any  other  parties  to  a  contract. 

The  third  party  is  brought  into  the  contract  relation  as  a 
principal,  and  after  that  in  most  cases  the  agent  is  disregarded. 
The  principal  and  the  third  party  contract  with  each  other,  and, 
if  the  contract  has  not  been  executed,  each  has  the  right  to 
compel  the  performance  or  to  recover  damages  for  any  breach 
or  failure  in  performance.  In  any  dispute  in  regard  to  the 
contract,  the  resulting  suit  will  be  between  the  parties,  and  the 
agent  will  not  figure  save  as  a  witness  able  to  give  material 
evidence.  If  there  has  been  fraud  or  false  representation  on 
either  side,  the  fact  that  the  transaction  has  been  negotiated 
through  an  agent  does  not  affect  the  liabilities  or  the  remedies. 

Note: 

I.  When  dealing  through  an  agent,  the  third  party 
should  bear  in  mind  that  it  is  the  principal  with 
whom  he  contracts. 


Review  Questions 

How  can  a  person  dealing  with  an  agent  asc^tain  his  authority? 

Why  is  it  hard  to  tell  what  the  agent  has  a  right  to  do ' 
With  whom  does  the  third  party  really  contract?     If  any  suit 

arose,  who  would  be  the  parties? 
When  does  an  agent  make  himself  responsible  to  the  third  party  ? 


CHAPTER  XXVI 
TERMINATION  OF  AGENCY 

§  149.     Termination  by  Fulfilment 

The  agent's  authority  Is  terminated  when  he  completes  the 
purposes  of  his  agency,  or  at  the  expiration  of  the  period  for 
which  he  was  engaged.  It  is  obvious  that  if  an  agent  has  been 
employed  to  purchase  a  farm  and  the  farm  has  been  purchased, 
the  agent's  authority  is  ended;  or  if  a  salesman  has  been  en- 
gaged for  a  year  to  sell  goods,  it  is  plain  that  the  agency,  unless 
renewed,  terminates  at  the  end  of  the  year.  Generally,  the  rule 
is  that  the  agency  ends  at  the  termination  of  the  period  for 
which  the  agent  has  been  engaged,  or  the  completion  of  the 
undertaking  for  which  he  has  been  retained. 

The  principal  should  in  some  way  inform  those  who  have 
been  dealing  with  the  agent  that  the  agent  no  longer  has  au- 
thority to  act.  If  the  principal  fails  to  do  this,  and  the  agent 
continues  to  act,  the  principal  is  bound. 

Note: 

I.     An  agency  terminates  naturally  (a)  when  the  term 
ends,  or  (b)  when  the  undertaking  is  completed. 

§  150.    Termination  by  Either  Party 

The  contract  of  agency  may  be  terminated  at  any  time  by 
either  the  principal  or  the  agent.  It  is  obvious  that  the  con- 
tract between  principal  and  agent  (like  any  other  contract) 
may  terminate  at  any  time  by  agreement  of  the  parties.  It  is 
also  true  that  the  contract  (since  it  is  one  of  mutual  trust  and 
confidence)  may  be  terminated  at  will  by  either  one  of  the 
parties  against  the  consent  of  the  other  party,  except  in  the 

20s 


2o6  AGENCY 

case  of  an  agent  having  an  interest  in  the  subject  matter;  in 
which  event  the  principal  cannot  terminate  the  relation  without 
the  agent's  consent.     (  See  §  152.) 

If  the  principal  and  the  agent  contracted  for  a  certain 
period  of  time  or  for  a  certain  undertaking,  and  the  principal 
revoked  the  agent's  authority  without  good  cause,  the  former 
would  be  liable  to  suit  for  damages  by  the  agent  for  breach  of 
contract. 

Where  there  is  employment  for  a  definite  period  of  time, 
express  or  implied,  and  the  agent  is  discharged  without  cause 
before  the  expiration  of  the  period,  the  principal  will  be 
liable  to  the  agent  as  in  the  breach  of  any  other  contract; 
in  such  cases  the  agent  may  elect  to  treat  the  contract  as 
rescinded  and  bring  an  action  to  recover  the  value  of  his 
services  and  money  expended.^ 

The  agent  can  renounce  his  employment  at  any  time.  The 
courts  will  not  force  a  man  to  work  for  another  against  his 
will.  If,  however,  the  agent  has  agreed  to  act  for  a  certain 
time,  or  to  do  some  particular  thing,  he  may  be  liable  to  pay 
damages  if  he  breaks  off  before  the  expiration  of  the  period. 
Also,  if  he  tries  to  act  for  someone  else  in  the  same  line  of 
business  before  the  expiration  of  the  term,  it  is  probable  that 
the  principal  could  obtain  an  injunction  to  prevent  his  working 
for  a  competitor.  In  a  contract  of  agency,  there  is  often 
inserted  a  clause  providing  that  the  agent  shall  not  leave  the 
employ  of  the  principal  and  represent  anyone  else  in  the  same 
line  of  business  for  a  specified  period  of  time  after  his  con- 
tract terminates.     (See  §  138.) 

If  the  subject  matter  of  an  agency  is  destroyed,  the  con- 
tract is  thereby  terminated.  A  case  of  this  kind  would  occur 
when  a  building  which  is  to  be  leased  by  an  agent  is  burned 
before  the  lease  is  effected. 


'Glover  v.   Henderson,   120  Mo.   367. 


TERMINATION  OF  AGENCY  207 

Notice  of  Revocation.  So  far  as  the  agent  is  concerned, 
the  act  of  revocation  becomes  operative  only  from  the  time 
he  has  actual  notice  thereof;  notice  to  third  parties  without 
notice  to  the  agent  will  not  effect  a  revocation  as  to  the  agent. 
Conversely,  a  notice  only  to  the  agent  is  not  effective  as  to 
third  parties.  The  acts  of  the  agent  in  dealing  with  third 
parties  without  notice  are  binding  on  the  principal.  Whatever 
is  sufficient  to  put  an  agent  or  third  party  on  inquiry  will 
serve  as  a  legal  notice  of  revocation. 

Notes: 

1.  Either  party  may  terminate  a  contract  of  agency 

at  any  time. 

2.  Either  party  breaking  a  contract  of  agency  for  a 

specified  period  or  undertaking  without  just  cause 
is  liable  in  damages. 

3.  An  agent  who  breaks  his  contract  may  be  prevented 

during  the  term  of  the  contract  from  taking  em- 
ployment with  a  business  competitor. 

§  151.    Termination  by  Disability 

An  agent's  authority  is  revoked  by  the  death,  insanity, 
or  bankruptcy  of  his  principal;  in  like  manner  the  relation 
is  destroyed  by  the  death  or  disability  of  the  agent.  This  is  a 
principle  of  universal  application.  When  a  man  dies,  all  con- 
tracts of  agency  cease  at  once;  all  powers  of  attorney,  and 
every  authority  to  anyone  else  to  act  for  him  are  terminated. 
If  in  ignorance  of  his  principal's  death  an  agent  did  business 
for  him,  the  business  would  be  void  and  of  no  effect. 

A  case  which  often  happens  is  that  of  a  person  of  ad- 
vanced years  who  gives  personal  property  to  an  agent  to 
deliver  to  someone  else  and  then  dies  before  the  property 
has  been  turned  over.  In  such  cases  the  courts  hold  that  the 
agency  is  revoked  by  the  death  of  the  principal,  and  the  gift 
cannot  take  effect. 


208  AGENCY 

In  an  Illinois  case,  Mrs.  Trubey  had  her  lawyer  take  from 
a  bank  vault  a  metal  box  of  jewels  and  securities.  She  made 
parcels  of  these  and  designated  to  whom  each  parcel  was  to 
go.  Then  she  put  them  in  charge  of  her  lawyer,  but  set  no 
time  for  delivery.  He  receipted  for  them  and  placed  them 
in  another  vault.  Within  three  months  Mrs.  Trubey  died. 
The  matter  came  before  the  courts  for  adjudication.  It  went 
to  the  Supreme  Court  of  Illinois,  which  held  that  the  lawyer 
was  undoubtedly  Mrs.  Trubey's  agent  to  deliver  the  property; 
but  when  she  died  the  agency  was  revoked  by  that  fact,  and 
that,  as  the  property  had  not  been  delivered,  it  belonged  to 
her  estate  and  the  people  designated  had  no  claim  to  it.  The 
court  expressed  regret  that  it  was  not  possible  under  the  rules 
of  law  to  give  effect  to  what  Mrs.  Trubey  evidently  intended. 
It  would  seem  that  her  lawyer  was  much  at  fault.^ 

The  death  of  the  agent  also  terminates  the  relation.  When 
the  relation  of  principal  and  agent  is  broken  up  by  the  sick- 
ness or  other  disability  of  the  agent,  the  condition  will 
be  the  same  as  when  any  other  employee  finds  his  term  of 
employment  broken  by  disability.  In  all  such  cases  the  general 
rule  is  that  the  agent  or  the  employee  is  entitled  to  recover 
for  the  time  he  acted,  whatever  the  services  were  worth  to  the 
principal  or  the  employer. 

In  a  New  York  case  it  was  held  that  when  an  agent  is 
prevented  by  sickness  or  death  from  completing  his  contract, 
he  or  his  executor  is  entitled  to  the  value  of  the  services 
actually  rendered.^ 

Insanity  of  the  principal  has  the  same  effect  as  death.  If 
insane,  a  principal  can  no  longer  contract  himself,  and  neither 
can  he  contract  by  an  agent.  The  insanity  of  the  agent 
terminates  the  relation  because  he  has  no  longer  the  capacity 
to  represent  his  principal. 


'Trubey  v.  Pease,  240  111.  513. 
•  Wolfe  V.  Howes,  20  N.  Y.  197. 


TERMINATION  OF  AGENCY  2 09 

The  bankruptcy  of  the  principal,  and  in  some  cases  of 
the  agent,  would  destroy  the  relation.  In  the  case  of  bank- 
ruptcy, the  bankrupt  can  no  longer  continue  his  business,  but 
it  is  taken  over  by  the  court  or  the  trustees  in  bankruptcy; 
and  as  he  cannot  do  business  himself  he  cannot  do  it  through 
an  agent.  Insolvency  would  not  have  this  effect.  (See 
Chapter  LXXXI.) 

If  the  principal  parts  with  the  subject  matter,  that  ter- 
minates the  agency. 

Notes: 

1.  An  agent  can  act  only  for  a  party  who  can  act  for 

himself. 

2.  An  agent's  authority  ends  when  the  capacity  of  the 

principal  to  contract  ends. 

3.  An  agent's  incapacity  to  act  ends  the  relation. 


§  152.    An  Agent  with  an  Interest 

An  agency  coupled  with  an  interest  cannot  be  revoked  by 
the  principal  nor  will  his  death  or  insanity  revoke  it.  When 
the  agent  is  also  himself  interested  in  the  matter  to  be  ac- 
complished, it  places  him  in  a  different  relation  to  the  prin- 
cipal; and  the  principal  cannot  at  will  destroy  the  relation. 
If,  for  instance,  an  agent  is  employed  to  sell  a  horse,  and  the 
agreement  is  that  he  is  to  advance  the  principal  one-half  the 
price  and  pay  himself  when  he  sells  the  horse,  the  principal 
cannot  prevent  him  from  selling  the  horse.  The  agent  would 
have  an  interest  in  the  matter  himself,  and  could  go  on  and 
do  that  which  he  had  agreed  to  do. 

The  interest  that  causes  a  power  of  attorney  to  survive 
after  death  must  be  an  interest  in  the  subject  matter  of  the 
agency  and  not  in  that  which  is  produced  by  the  exercise  of 
the  power. 


2IO  AGENCY 

Note: 

I.  An  agent  with  an  interest  in  the  property  itself 
cannot  be  discharged,  as  he  is  to  that  extent  a 
partner  with  the  principal. 


Review  Questions 

How  may  the  contract  of  agency  terminate?  If  an  agent  con- 
tinues to  act  after  his  engagement  has  ended,  does  he  bind 
his  principal? 

How  is  it  possible  to  prevent  an  agent's  going  to  work  for  a 
competitor  when  his  engagement  terminates?  If  the  principal 
revokes  the  authority  of  his  agent,  who  must  be  notified? 

What  is  the  general  rule  as  to  the  death  or  insanity  of  the 
principal?  Why?  What  is  the  rule  as  to  compensation  when 
the  contract  is  terminated  by  the  death  or  disability  of  the 
agent  ? 

What  is  the  effect  of  bankruptcy?  Of  insolvency?  What  is  the 
distinction  between  bankruptcy  and  insolvency? 

A  borrowed  money  of  B,  giving  B  as  collateral  a  power  of 
attorney  to  collect  certain  rents.  A  died.  Was  B's  power  of 
attorney  terminated?  Is  the  tenant's  obligation  discharged 
by  payment  to  B  ? 

What  is  the  effect  when  an  agent  has  an  interest  in  the  subject 
matter?    Why? 


PART  V 
NEGOTIABLE  INSTRUMENTS 


CHAPTER  XXVII 

FORM  AND  INTERPRETATION^ 

§  153.     The  Quality  of  Negotiability 

The  negotiable  instruments  in  ordinary  use  are:  (i) 
promissory  notes,  (2)  drafts  or  bills  of  exchange,  and  (3) 
checks.  In  all  the  states  that  have  adopted  the  Uniform  Bills 
of  Lading  Act,  bills  of  lading  are  made  negotiable  instruments. 
The  quality  of  negotiability  lies  in  the  fact  that  any  person, 
not  an  original  party,  who  takes  a  negotiable  instrument  in 
the  ordinary  course  of  business,  may  sue  on  it  when  due,  in 
his  own  name,  and  the  person  who  is  the  obligor  will  be 
compelled  to  pay  it.  Negotiable  instruments  are  also  called 
"commercial  paper." 

Any  ordinary  contract  may  be  assigned  by  executing  an 
assignment,  but  in  such  case  the  assignee  merely  steps  into 
the  shoes  of  the  person  who  assigned  it,  and  if  there  has  been 
any  reason,  as  between  the  parties,  why  it  should  not  be  paid, 
this  can  be  set  up  against  the  assignee,  if  he  brings  suit, 
exactly  as  if  he  were  the  original  party.  If  this  were  true 
of  a  note,  no  one  would  dare  to  discount  it,  for,  when  the 
time  of  payment  came,  any  reason  for  non-payment  that  might 
exist  between  the  original  parties  could  be  used  to  destroy 
the  whole  value  of  the  note.  Hence,  for  the  convenience  of 
business,  the  law  of  negotiable  instruments  has  grown  up,  to 
protect  the  man  who  takes  them  "in  due  course  of  business." 

"In  due  course  of  business"  means  taken  before  its  date 
for  payment,  for  a  valuable  consideration  and  without  knowl- 
edge of  anything  that  would  affect  the  title.     The  law  says: 


*For  forms  of  negotiable  instruments,  see  Chapter  GUI,  Forms  34-43. 

213 


214  NEGOTIABLE  INSTRUMENTS 

A  holder  in  due  course  holds  the  instrument  free  from 
defect  of  title  of  prior  parties,  and  free  from  any  defenses 
available  to  prior  parties  among  themselves  and  may  enforce 
payment  of  the  instrument  for  the  full  amount  thereof 
against  all  parties  liable  thereon. 

Non-Negotiable  Contracts.  A  simple  agreement  or  promise 
to  pay  a  sum  of  money  could  not  be  enforced  unless  there 
was  a  valid  consideration  for  the  promise,  and  an  assignee 
would  have  no  more  rights  than  the  original  holder.  That  is, 
if  suit  were  brought  on  such  an  agreement,  and  the  maker 
could  prove  that  no  consideration  had  been  given,  he  would 
not  be  made  to  pay.  The  same  rule  would  hold  as  between 
the  original  parties  to  a  note,  and  the  defense  of  no  considera- 
tion would  prevent  *  collection,  but  if  the  note  or  other 
negotiable  paper  had  been  negotiated,  that  is,  if  it  had  passed 
in  the  course  of  business  into  the  hands  of  an  innocent  holder 
for  value,  the  matter  of  consideration  would  not  figure,  and 
the  full  amount  would  have  to  be  paid. 

Notes,  drafts,  and  checks  are  used  so  extensively  that 
the  laws  governing  their  transfer  are  of  great  importance. 
When  the  subject  of  uniform  laws  was  brought  up,  the  law 
of  negotiable  instruments  was  the  first  to  be  reformed  and 
the  one  most  widely  adopted.  The  Uniform  Negotiable  In- 
struments Law  as  devised  by  the  commissioners  having  the 
work  in  hand  has  at  the  present  time  been  adopted  by  every 
state  and  territory  except  Georgia  and  Porto  Rico. 

In  discussing  this  subject,  the  Uniform  Negotiable  In- 
struments Law  has  been  followed  as  closely  as  possible,  and 
the  quotations  are  from  the  text  of  the  law. 

The  following  are  the  requirements  for  negotiable  instru- 
ments as  laid  down  in  the  law  itself : 

§  I. — An  instrument  to  be  negotiable  must  conform  to  the 
following  requirements ; 


FORM  AND  INTERPRETATION  215 

1.  It  must  be  in  writing  and  signed  by  the  maker  or 
drawer. 

2.  Must  contain  an  unconditional  promise  or  order  to 
pay  a  sum  certain  in  money. 

3.  Must  be  payable  on  demand,  or  at  a  fixed  or  determin- 
able future  time. 

4.  Must  be  payable  to  order  or  to  bearer;  and 

5.  Where  the  instrument  is  addressed  to  a  drawee,  he 
must  be  named  or  otherwise  indicated  therein  with  reasonable 
certainty. 

§  154.    Signature 

The  signer  of  an  instrument  is  liable,  and  anyone  signing 
a  trade-name  or  assumed  name  will  be  liable  personally.  A 
duly  authorized  agent  can  sign  for  his  principal,  and  if  he  is 
duly  authorized  and  signs  as  agent  or  in  a  representative 
capacity,  he  will  not  be  personally  liable.  If,  however,  he 
signs  as  agent  without  disclosing  his  principal,  he  will  be 
personally  liable. 

The  indorsement  of  a  corporation  or  an  infant  passes  the 
property  in  the  instrument,  though  the  corporation  or  infant 
may  not  be  liable.  A  note  signea  by  a  minor  cannot  be 
collected. 

A  forged  signature  is  absolutely  void  and  passes  no  right 
or  title. 

§  155-    Unconditional  Promise 

The  Uniform  Law  allows  two  variations  of  the  require- 
ment of  an  unconditional  promise  or  order  to  pay. 

§  3. — An  unqualified  order  or  promise  to  pay  is  uncondi- 
tional within  the  meaning  of  this  act,  though  coupled  with: 

1.  An  indication  of  a  particular  fund  out  of  which  reim- 
bursement is  to  be  made,  or  a  particular  account  to  be  debited 
with  the  amount;  or 

2.  A  statement  of  the  transaction  which  gives  rise  to  the 
instrument. 


2l6  NEGOTIABLE  INSTRUMENTS 

But  an  order  or  promise  to  pay  out  of  a  particular  fund  is 
not  unconditional. 

§  156.     Certainty  as  to  Sum 

It  is  to  be  noted  that  the  law  allows  certain  variations  as 
to  the  certainty  of  the  sum: 

§  2. — The  sum  payable  is  a  sum  certain  within  the  mean- 
ing of  this  act,  although  it  is  to  be  paid: 

1.  With  interest;  or 

2.  By  stated  instalments;  or 

3.  By  stated  instalments,  with  a  provision  that  upon  de- 
fault in  payment  of  any  instalment  or  of  interest,  the  whole 
shall  become  due;  or 

4.  With  exchange,  whether  at  a  fixed  rate  or  at  the 
current  rate;  or 

5.  With  costs  of  collection  or  an  attorney's  fee,  in  case 
payment  shall  not  be  made  at  maturity. 

§  157.     Payable  on  Demand 

§  7. — An  instrument  is  payable  on  demand : 

1.  Where  it  is  expressed  to  be  payable  on  demand,  or  at 
sight,  or  on  presentation;  or 

2.  In  which  no  time  for  payment  is  expressed. 
Where  an  instrument  is  issued,  accepted  or  indorsed  when 

overdue,  it  is,  as  regards  the  person  so  issuing,  accepting  or 
indorsing  it,  payable  on  demand. 

§  158.     Certain  Future  Time 

The  law  clearly  expresses  that  the  time  must  be  certain. 

§  4. — An  instrument  is  payable  at  a  determinable  future 
time,  within  the  meaning  of  this  act,  which  is  expressed  to 
be  payable : 

1.  At  a  fixed  period  after  date  or  sight;  or 

2.  On  or  before  a  fixed  or  determinable  future  time 
specified  therein;  or 

3.  On  or  at  a  fixed  period  after  the  occurrence  of  a 
specified  event,  which  is  certain  to  happen,  though  the  time 
of  happening  be  uncertain. 


FORM  AND  INTERPRETATION  217 

An  instrument  payable  upon  a  contingency  is  not  negoti- 
able, and  the  happening  of  the  event  does  not  cure  the  defect. 

§  159.    Payable  to  Order 

§  8. — The  instrument  is  payable  to  order  where  it  is 
drawn  payable  to  the  order  of  a  specified  person  or  to  him 
or  his  order.    It  may  be  drawn  payable  to  the  order  of: 

1.  A  payee  who  is  not  maker,  drawer  or  drawee;  or 

2.  The  drawer  or  maker;  or 

3.  The  drawee;  or 

4.  Two  or  more  payees  jointly ;  or 

5.  One  or  some  of  several  payees ;  or 

6.  The  holder  of  an  office  for  the  time  being. 
Where  the  instrument  is  payable  to  order  the  payee  must 

be  named  or  otherwise  indicated  therein  with  reasonable  cer- 
tainty. 

§  160.     Payable  to  Bearer 

§  9. — The  instrument  is  payable  to  bearer : 

1.  When  it  is  expressed  to  be  so  payable;  or 

2.  When  it  is  payable  to  a  person  named  therein  or 
bearer;  or 

3.  When  it  is  payable  to  the  order  of  a  fictitious  or  non- 
existing  person,  and  such  fact  was  known  to  the  person  mak- 
ing it  so  payable;  or 

4.  When  the  name  of  the  payee  does  not  purport  to  be 
the  name  of  any  person;  or 

5.  When  the  only  or  last  indorsement  is  an  indorsement 
in  blank. 

§  161.     The  Date 

The  law  provides  that  the  date  on  the  face  of  the  instru- 
ment is  presumed  to  be  the  true  date,  and  that  it  may  be  ante- 
dated or  post-dated,  provided  it  is  not  done  for  a  fraudulent 
purpose.  It  is  also  provided  that  if  a  date  is  left  blank,  any 
holder  may  insert  the  true  date.  If  an  instrument  is  issued 
with  any  material  particular  left  out,  the  holder  may  fill  in 
the  blanks. 


2i8  NEGOTIABLE  INSTRUMENTS 

A  ncte  dated  on  a  legal  holiday  other  than  Sunday  is  valid. 
In  New  Jersey  a  contract,  bill,  note,  or  check  drawn  or  made, 
accepted  or  delivered,  on  Sunday  is  void.  In  Massachusetts 
a  note  or  check  made  on  Sunday  is  void  as  between  the 
original  parties.  In  Connecticut,  a  defense  to  an  action  on 
a  note  made  on  Sunday  will  be  good  if  the  consideration  is 
restored.  Both  Massachusetts  and  Connecticut  protect  the 
bona  fide  holder  of  a  note  made,  accepted  or  drawn  on  Sun- 
day. In  New  York  a  note  dated  and  delivered  on  Sunday 
is  valid. 

§  162.     Consideration 

All  negotiable  paper  is  presumed  to  have  been  given  for 
a  valuable  consideration,  and  everyone  whose  signature  ap- 
pears on  it  is  presumed  to  have  become  a  party  for  a  valuable 
consideration.  Any  consideration  that  would  support  an  or- 
dinary contract  will  be  sufficient.  An  existing  debt  would  be 
a  good  consideration  for  a  note  or  draft  in  settlement. 

Absence  or  failure  of  consideration  is  not  a  good  defense 
against  a  holder  in  due  course  for  value. 

If  a  gambling  debt  has  been  paid  with  a  negotiable  instru- 
ment, the  maker  can  generally  set  up  the  defense  of  illegality 
only  against  the  original  party.  In  a  few  states,  however, 
gambling  contracts  are  absolutely  void,  and  there  the  maker 
of  such  an  instrument  cannot  be  held,  but  the  indorser  can, 
inasmuch  as  an  indorser  warrants  the  legality  of  the  instru- 
ment. 

Anyone  having  a  lien  on  a  negotiable  instrument,  is  a 
holder  for  value  to  the  extent  of  his  lien. 

§  163.     Delivery 

A  negotiable  instrument  is  incomplete  until  delivery.  If 
an  incomplete  instrument  is  completed  and  delivered  without 
authority  of  the  maker  or  drawer,  it  will  not  be  valid  unless 


FORM  AND  INTERPRETATION  219 

it  comes  in  due  course  to  an  innocent  holder  for  value,  in  which 
case  it  will  be  presumed  conclusively  to  be  good. 

§  164.     Rules  of  Construction 

§  10. — The  instrument  need  not  follow  the  language  of 
this  act,  but  any  terms  are  sufficient  which  clearly  indicate  an 
intention  to  conform  to  the  requirements  hereof. 

§  17. — Where  the  language  of  the  instrument  is  ambigu- 
ous, or  there  are  omissions  therein,  the  following  rules  of 
construction  apply : 

1.  Where  the  sum  payable  is  expressed  in  words  and  also 
in  figures  and  there  is  a  discrepancy  between  the  two,  the 
sum  denoted  by  the  words  is  the  sum  payable;  but  if  the 
words  are  ambiguous  or  uncertain,  references  may  be  had  to 
the  figures  to  fix  the  amount ; 

2.  Where  the  instrument  provides  for  the  payment  of  in- 
terest, without  specifying  the  date  from  which  interest  is  to 
run,  the  interest  runs  from  the  date  of  the  instrument,  and 
if  the  instrument  is  undated,  from  the  issue  thereof; 

3.  Where  the  instrument  is  not  dated,  it  will  be  consid- 
ered to  be  dated  as  of  the  time  it  was  issued ; 

4.  Where  there  is  a  conflict  between  the  written  and 
printed  provisions  of  the  instrument,  the  written  provisions 
prevail ; 

5.  Where  the  instrument  is  so  ambiguous  that  there  is 
doubt  whether  it  is  a  bill  or  note,  the  holder  may  treat  it  as 
either  at  his  election; 

6.  Where  a  signature  is  so  placed  upon  the  instrument 
that  it  is  not  clear  in  what  capacity  the  person  making  the 
same  intended  to  sign,  he  is  to  be  deemed  an  indorser; 

7.  Where  an  instrument  containing  the  words  "I  promise 
to  pay"  is  signed  by  two  or  more  persons,  they  are  deemed  to 
be  jointly  and  severally  liable  thereon. 

§  165.    Allowable  Provisions 

§  5. — An  instrument  which  contains  an  order  or  promise 
to  do  any  act  in  addition  to  the  payment  of  money  is  not 
negotiable.  But  the  negotiable  character  of  an  instrument 
otherwise  negotiable  is  not  affected  by  a  provision  which : 


220  NEGOTIABLE  INSTRUMENTS 

1.  Authorizes  the  sale  of  collateral  securities  in  case  the 
instrument  be  not  paid  at  maturity ;  or 

2.  Authorizes  a  confession  of  judgment  if  the  instrument 
be  not  paid  at  maturity;  or 

3.  Waives  the  benefit  of  any  law  intended  for  the  advan- 
tage or  protection  of  the  obligor;  or 

4.  Gives  the  holder  an  election  to  require  something  to 
be  done  in  lieu  of  payment  of  money. 

But  nothing  in  this  section  shall  validate  any  provision 
or  stipulation  otherwise  illegal. 

§  166.     Non-Essentials 

§  6. — The  validity  and  negotiable  character  of  an  instru- 
ment are  not  affected  by  the   fact  that : 

1.  It  is  not  dated;  or 

2.  Does  not  specify  the  value  given,  or  that  any  value 
has  been  given  therefor;  or 

3.  Does  not  specify  the  place  where  it  is  drawn  or  the 
place  where  it  is  payable ;  or 

4.  Bears  a  seal ;  or 

5.  Designates  a  particular  kind  of  current  money  in 
which  payment  is  to  be  made. 

But  nothing  in  this  section  shall  alter  or  repeal  any  statute 
requiring  in  certain  cases  the  nature  of  the  consideration  to 
be  stated  in  the  instrument. 


Review  Questions 

1.  Give  a  succinct  but  clear   idea  of  commercial  paper.     If  the 

assignee  of  an  ordinary  contract  has  to  bring  suit  to  enforce 
it,  what  may  happen?  What  is  meant  by  "due  course  of 
business"? 

2.  What    are    the    five   requirements    for   negotiable    instruments? 

What  are  the  usual  negotiable  words? 

3.  How  should  an  agent  sign  a  note? 

4.  What  effect  has  a  minor's  note?     A  minor's  indorsement? 

5.  Would  a  note  payable  from  "rents  for  March,  1919,  from  the 

maker's  apartment  house.  No.  154  Clinton  Avenue,  Baltimore, 
Mar5dand,"  be  negotiable? 


FORM  AND  INTERPRETATION  221 

6.  Is  a  note  payable  in  instalments  good?     Is  a  note  good  that 

adds  costs  of  collection? 

7.  Would  a  note  payable  ninety  days  after  the  death  of  the  maker 

be  negotiable?  What  if  it  were  payable  ninety  days  after 
the  payee  came  of  age? 

8.  Is  a  note  with  no  time  expressed  good? 

9.  Is  a  note  or  a  check  invalidated  if  dated  on  a  legal  holiday? 

Dated  on  Sunday?    Explain  fully. 

10.  A  affixes  his  signature  to  a  blank  paper  and  delivers  it  to  B 

for  the  purpose  of  converting  it  into  a  negotiable  note.  B 
writes  a  larger  amount  and  a  shorter  time  than  agreed  on. 
Is  A  liable  to  a  holder  in  due  course  without  notice? 

11.  C  pays  a  note  that  apparently  bears  his  signature  as  maker. 

Later  he  finds  that  the  signature  was  forged.  May  he  recover 
the  money  paid?     State  the  principle. 

12.  A  bank  discounts  a  note  having  a   genuine   indorsement,  but 

forged  signature  of  maker.    Who  bears  loss? 

13.  If  in  a  note  there  is  a  conflict  between  words  and  figures  as  to 

sum  payable,  what  prevails?  As  between  printed  words  and 
written  words  which  prevails? 

14.  Is  it  necessary  that  a  note  or  a  bill  should  contain  the  words 

"value  received"  ?    That  it  should  be  dated  ? 

15.  What  provision  can  be  made  in  a  note  as  to  the  sale  of  collateral 

securities?    What  are  "collateral  securities"? 


CHAPTER  XXVIII 

NEGOTIATION^ 

§  167.     Method  of  Negotiation 

§  30. — An  instrument  is  negotiated  when  it  is  transferred 
from  one  person  to  another  in  such  manner  as  to  constitute 
the  transferee  the  holder  thereof.  If  payable  to  bearer  it 
is  negotiated  by  delivery;  if  payable  to  order  it  is  negotiated 
by  the  indorsement  of  the  holder  completed  by  delivery. 

§  31. — The  indorsement  must  be  written  on  the  instrument 
itself  or  upon  a  paper  attached  thereto.  The  signature  of 
the  indorser,  without  additional  words,  is  a  sufficient  in- 
dorsement. 

§  32. — The  indorsement  must  be  an  indorsement  of  the 
entire  instrument.  An  indorsement,  which  purports  to  trans- 
fer to  the  indorsee  a  part  only  of  the  amount  payable,  or 
which  purports  to  transfer  the  instrument  to  two  or  more  in- 
dorsees severally,  does  not  operate  as  a  negotiation  of  the  in- 
strument. But  where  the  instrument  has  been  paid  in  part, 
it  may  be  indorsed  as  to  the  residue. 

§  168.    The  Indorser's  Contract 

The  contract  of  any  one  who  indorses  negotiable  instru- 
ments is  that  he  warrants  to  all  subsequent  holders  in  due 
course : 

1.  That  the  instrument  is  genuine. 

2.  That  he  has  good  title  to  it. 

3.  That  all  prior  parties  had  capacity  to  contract. 

4.  That  the  instrument  is,  at  the  time  he  indorses  it, 

valid  and  subsisting. 


1  For  forms  of  indorsement,  see  Chapter  GUI,  Forms  36,  44. 

222 


NEGOTIATION  223 

He  also  warrants  that  on  presentment  when  due  it  will 
be  accepted  or  paid  or  both  according  to  its  tenor,  and  that 
if  it  be  dishonored  and  the  necessary  protest  and  notice  be 
given,  he  will  pay  the  amount  thereof  to  the  holder  or  to  any 
subsequent  indorser  who  may  have  to  pay  it. 

§  169.    Blank  or  Special  Indorsement 

§  33. — An  indorsement  may  be  either  special  or  in  blank ; 
and  it  may  also  be  either  restrictive  or  qualified,  or  con- 
ditional. 

§  34. — A  special  indorsement  specifies  the  person  to  whom, 
or  to  whose  order  the  instrument  is  to  be  payable;  and  the 
indorsement  of  such  indorsee  is  necessary  to  the  further 
negotiation  of  the  instrument.  An  indorsement  in  blank 
specifies  no  indorsee,  and  an  instrument  so  indorsed  is  pay- 
able to  bearer,  and  may  be  negotiated  by  delivery. 

■§  35. — The  holder  may  convert  a  blank  indorsement  into 
a  special  indorsement  by  writing  over  the  signature  of  the 
indorser  in  blank  any  contract  consistent  with  the  character 
of  the  indorsement. 

§  170.    Restrictive  Indorsement 

l§  36. — An  indorsement  is  restrictive,  which  either : 

1.  Prohibits  the  further  negotiation  of  the  instrument;  or 

2.  Constitutes  the  indorsee  the  agent  of  the  indorser;  or 

3.  Vests  the  title  in  the  indorsee  in  trust  for  or  to  the 
use  of  some  other  person. 

But  the  mere  absence  of  words  implying  power  to  negoti- 
ate does  not  make  an  indorsement  restrictive. 

§  37. — A  restrictive  indorsement  confers  upon  the  indorsee 
the  right : 

1.  To  receive  payment  of  the  instrument; 

2.  To  bring  any  action  thereon  that  the  indorser  could 
bring ; 

3.  To  transfer  his  rights  as  such  indorsee,  where  the 
form  of  the  indorsement  authorizes  him  to  do  so. 

But  all  subsequent  indorsees  acquire  only  the  title  of  the 
first  indorsee  under  the  restrictive  indorsement. 


224  NEGOTIABLE  INSTRUMENTS 

§  171.     Qualified  Indorsement 

§  38. — A  qualified  indorsement  constitutes  the  indorser  a 
mere  assignor  of  the  title  to  the  instrument.  It  may  be  made 
by  adding  to  the  indorser's  signature  the  words  "without  re- 
course" or  any  words  of  similar  import.  Such  an  indorse- 
ment does  not  impair  the  negotiable  character  of  the  instru- 
ment. 

§  172.     Conditional  Indorsement 

The  payee  is  not  concerned  about  a  conditional  indorse- 
ment. Such  an  indorsement  affects  the  rights  of  only  those 
who  take  the  instrument  after  the  indorsement.  A  conditional 
indorsement  imposes  some  condition  on  payment,  as  "Pay  to 
Henry  Alford  upon  delivery  of  motor  truck,  on  March  i, 
1920.  Mark  Anderson." 

In  such  a  case,  the  payee  may  take  no  notice  of  the  condi- 
tion and  may  pay  any  lawful  holder  of  the  note  whether  the 
condition  has  been  fulfilled  or  not.  But  any  holder  of  such 
a  note  would  hold  it,  or  any  amount  paid  him  upon  it,  subject 
to  the  rights  of  the  conditional  indorser. 

§  173.     Effect  of  Indorsement 

An  instrument  payable  to  bearer  may  be  indorsed  specially 
to  some  particular  person  and  after  that  may  again  be  passed 
on  by  delivery. 

§41. — Where  an  instrument  is  payable  to  the  order  of 
two  or  more  payees  or  indorsees  who  are  not  partners,  all 
must  indorse,  unless  the  one  indorsing  has  authority  to  in- 
dorse for  the  others. 

§  42. — Where  an  instrument  is  drawn  or  indorsed  to  a 
person  as  "cashier"  or  other  fiscal  officer  of  a  bank  or  cor- 
poration, it  is  deemed  prima  facie  to  be  payable  to  the  bank 
or  corporation  of  which  he  is  such  officer;  and  may  be 
negotiated  by  either  the  indorsement  of  the  bank  or  corpora- 
tion or  the  indorsement  of  the  officer. 


NEGOTIATION  225 

§  43. — Where  the  name  of  a  payee  or  indorsee  is  wrongly 
designated  or  misspelled,  he  may  indorse  the  instrument  as 
therein  described,  adding,  if  he  think  fit,  his  proper  signature. 

§  44. — Where  any  person  is  under  obligation  to  indorse  in 
a  representative  capacity,  he  may  indorse  in  such  terms  as 
to  negative  personal  liability. 

§  45. — Except  where  an  indorsement  bears  date  after  the 
maturity  of  the  instrument,  every  negotiation  is  deemed 
prima  facie  to  have  been  effected  before  the  instrument  was 
overdue. 

§  46. — Except  where  the  contrary  appears  every  indorse- 
ment is  presumed  prima  facie  to  have  been  made  at  the  place 
where  the  instrument  is  dated. 


Review  Questions 

1.  What  is  the  difference  between  assigning  a  simple  contract,  and 

negotiating  a  note  or  other  commercial  paper?  What  is  the 
form  ? 

2.  What  is  a  contract  of  indorsement?    What  obligation  is  assumed 

by  the  indorser? 

3.  If  an  instrument  payable  to  bearer  is  indorsed  specially  to  some 

particular  person  and  after  that  is  passed  on  by  delivery,  can 
the  holder  by  delivery  collect  from  the  special  indorser  or  the 
special  indorsee? 

4.  Give  pro   forma  illustrations  of  the  following  indorsements  of 

promissory  notes  and  show  the  purpose  and  effect  of  each 
indorsement:  (a)  in  full,  (b)  conditional,  (c)  restrictive,  (d) 
qualified. 

5.  What  is  the  procedure  where  the  name  of  a  payee  or  indorsee 

has  been  misspelled  or  his  initials  are  not  given  correctly? 


CHAPTER  XXIX 

RIGHTS  OF  HOLDER 

§  174.     Holder  in  Due  Course 

The  Uniform  Negotiable  Instruments  Law  uses  the  phrase 
"a.  holder  in  due  course"  to  express  the  idea  of  an  innocent 
holder  for  value,  that  is,  one  who  has  taken  the  instrument 
without  knowledge  of  anything  unusual  in  connection  with 
it  and  who  has  given  a  valuable  consideration  for  his  title. 
Such  a  holder  of  a  negotiable  instrument  may  sue  on  it  in 
his  own  name. 

§  52. — A  holder  in  due  course  is  a  holder  who  has  taken 
the  instrument  under  the  following  conditions: 

1.  That  it  is  complete  and  regular  upon  its  face; 

2.  That  he  became  the  holder  of  it  before  it  was  over- 
due, and  without  notice  that  it  had  been  previously  dis- 
honored, if  such  were  the  fact; 

3.  That  he  took  it  in  good  faith  and  for  value; 

4.  That  at  the  time  it  was  negotiated  to  him  he  had  no 
notice  of  any  infirmity  in  the  instrument  or  defect  in  the  title 
of  the  person  negotiating  it. 

§  53. — Where  an  instrument  payable  on  demand  is  ne- 
gotiated an  unreasonable  length  of  time  after  its  issue,  the 
holder  is  not  deemed  a  holder  in  due  course. 

§  54. — Where  the  transferee  receives  notice  of  any  in- 
firmity in  the  instrument  or  defect  in  the  title  of  the  person 
negotiating  the  same  before  he  has  paid  the  full  amount 
agreed  to  be  paid  therefor,  he  will  be  deemed  a  holder  in 
due  course  only  to  the  extent  of  the  amount  theretofore  paid 
by  him. 

226 


RIGHTS  OF  HOLDER  227 

§  175.     Defects  of  Title 

§  55. — The  title  of  a  person  who  negotiates  an  instrument 
is  defective  within  the  meaning  of  this  act  when  he  obtained 
the  instrument,  or  any  signature  thereto,  by  fraud,  duress, 
or  force  and  fear,  or  other  unlawful  means,  or  for  an  illegal 
consideration,  or  when  he  negotiates  it  in  breach  of  faith,  or 
under  such  circumstances  as  amount  to  a  fraud. 

§  56. — To  constitute  notice  of  an  infirmity  in  the  instru- 
ment or  defect  in  the  title  of  the  person  negotiating  the  same, 
the  person  to  whom  it  is  negotiated  must  have  had  actual 
knowledge  of  the  infirmity  or  defect,  or  knowledge  of  such 
facts  that  his  action  in  taking  the  instrument  amounted  to 
bad  faith. 

§  176.     The  Rights  of  a  Holder  in  Due  Course 

A  holder  in  due  course  of  a  negotiable  instrument  is  in  a 
strong  position.  He  has  a  good  claim  against  any  of  the 
prior  parties  to  the  instrument  regardless  of  any  claim  they 
may  have  for  fraud,  duress,  lack  of  consideration,  and,  with 
a  few  exceptions,  illegality.  Of  course,  if  the  holder  knew 
of  any  of  these  defects  before  taking  the  instrument,  he  would 
not  be  a  holder  in  due  course.  H  he  occupies  the  position  of 
holder  in  due  course,  he  may  take  any  negotiable  instrument 
without  inquiry  and  without  any  fear  that  in  the  event  of 
having  to  bring  suit  he  may  meet  with  any  of  the  defenses 
named. 

§  57. — A  holder  in  due  course  holds  the  instrument  free 
from  any  defect  of  title  of  prior  parties  and  free  from  de- 
fenses available  to  prior  parties  among  themselves,  and  may 
enforce  payment  of  the  instrument  for  the  full  amount  there- 
of against  all  parties  liable  thereon. 

§  177.     Effect  of  Irregular  Transfer 

If  a  holder  of  negotiable  paper  not  "a  holder  in  due 
course"  brings  suit  to  collect,  he  must  face  all  the  defenses 


228  NEGOTIABLE  INSTRUMENTS 

that  can  be  brought  up  in  a  suit  between  the  original  parties. 
There  may  have  been  fraud  as  between  the  original  parties 
or  other  cause  why  the  note  should  not  be  paid.  If  it  has 
come  into  the  hands  of  an  innocent  holder,  he  can  collect 
notwithstanding,  but  if  the  holder  did  not  take  the  instrument 
in  due  course,  any  of  the  defenses  existing  between  the  original 
parties  may  be  used  against  him. 

§97. — In  the  hands  of  any  holder  other  than  a  holder  in 
due  course,  a  negotiable  instrument  is  subject  to  the  same 
defenses  as  if  it  were  non-negotiable.  But  a  holder  who 
derives  his  title  through  a  holder  in  due  course,  and  who  is 
not  himself  a  party  to  any  fraud  or  illegality  affecting  the 
instrument,  has  all  the  rights  of  such  former  holder  in  respect 
of  all  parties  prior  to  the  latter. 

If  negotiable  instruments  payable  to  bearer  are  lost,  the 
finder  does  not  have  good  title,  but  if  he  manages  to  transfer 
them  to  an  innocent  holder  for  value,  such  holder  has  a  good 
title.  This  rule  does  not  apply  to  certificates  of  stock  or  other 
instruments  that  are  only  quasi-negotiable. 


Review  Questions 

What  is  a  "holder  in  due  course"?  If  a  person  takes  an  undated 
note,  is  he  a  holder  in  due  course?  If  a  note  is  overdue,  will 
an  indorsee  be  a  holder  in  due  course?  If  the  indorsee  pays 
only  half  the  face  of  the  note,  will  he  be  a  holder  in  due 
course  ? 

Distinguish  the  position  of  a  bona  fide  holder  of  a  negotiable 
instrument  and  an  assignee  of  an  assignable  obligation  in  the 
event  of  their  suing  for  their  respective  claims. 

An  indorsee  who  has  notice  of  illegality  of  note  indorses  it  to  a 
bona  fide  holder  for  value,  and  takes  up  the  note  at  maturity. 
Is  he  entitled  to  sue  maker? 

If  A  lost  bearer  bonds  and  certificates  of  stock  indorsed  in  blank, 
and  C  took  them  from  the  finder  in  good  faith,  paying  value, 
what  interest  would  C  have? 


CHAPTER  XXX 
LIABILITY  OF  PARTIES 

§  178.     Liability  of  Maker 

The  maker  of  a  promissory  note  engages  to  pay  the  note 
he  issues  according  to  its  tenor  and  effect,  and  he  is  primarily 
liable.  Should  it  be  paid  by  one  of  the  indorsers,  the  maker 
will  later  have  to  reimburse  him  for  what  he  has  paid.  The 
maker  is  liable  even  if  the  note  is  not  presented  to  him  when 
due.  He  remains  liable  upon  it  until  it  is  outlawed  by  the 
Statute  of  Limitations.  He  is  not  liable  on  a  forged  instru- 
ment or  on  an  incomplete  instrument  lost  or  stolen  and  filled 
out  by  the  finder  or  thief. 

§  34. — ^Where  an  incomplete  instrument  has  not  been  de- 
livered it  will  not,  if  completed  and  negotiated  without 
authority,  be  a  valid  contract  in  the  hands  of  any  holder, 
as  against  any  person  whose  signature  was  placed  thereon 
before  delivery. 

§  42. — Where  a  signature  is  forged  or  made  without  au- 
thority of  the  person  whose  signature  it  purports  to  be,  it  is 
wholly  inoperative,  and  no  right  to  retain  the  instrument, 
and  to  give  a  discharge  therefor,  or  to  enforce  payment 
thereof  against  any  party  thereto,  can  be  acquired  through 
or  under  such  signature,  unless  the  party  against  whom  it  is 
sought  to  enforce  such  right  is  precluded  from  setting  up  the 
forgery  or  want  of  authority. 

§  179.     Liability  of  Indorser 

When  any  person  other  than  maker,  drawer,  or  acceptor 
places  his  signature  upon  an  instrument  he  is  deemed  to  be 
an  indorser. 

229 


230  NEGOTIABLE  INSTRUMENTS 

§  64. — Where  a  person,  not  otherwise  a  party  to  an  in- 
strument, places  thereon  his  signature  in  blank  before  de- 
livery, he  is  liable  as  indorser  in  accordance  with  the  follow- 
ing rules: 

1.  If  the  instrument  is  payable  to  the  order  of  a  third 
person,  he  is  liable  to  the  payee  and  to  all  subsequent  parties. 

2.  If  the  instrument  is  payable  to  the  order  of  the  maker 
or  drawer,  or  is  payable  to  bearer,  he  is  liable  to  all  parties 
subsequent  to  the  maker  or  drawer. 

3.  If  he  signs  for  the  accommodation  of  the  payee  he  is 
liable  to  all  parties  subsequent  to  the  payee. 

§  65. — Every  person  negotiating  an  instrument  by  delivery 
or  by  a  qualified  indorsement,  warrants: 

1.  That  the  instrument  is  genuine  and  in  all  respects 
what  it  purports  to  be; 

2.  That  he  has  a  good  title  to  it; 

3.  That  all  prior  parties  had  capacity  to  contract; 

4.  That  he  has  no  knowledge  of  any  fact  which  would 
impair  the  validity  of  the  instrument  or  render  it  valueless. 

§  67. — Where  a  person  places  his  indorsement  on  an  in- 
strument negotiable  by  delivery  he  incurs  all  the  liabilities 
of  an  indorser. 

The  contract  of  the  indorser,  like  that  of  the  drawer,  Is 
a  conditional  promise  to  pay.  The  conditions  are  that  the 
prior  parties  fail  to  pay  and  that  due  notice  of  their  faikire 
be  given. 

The  amount  of  the  indorser's  liability  is  the  face  of  the 
instrument,  and  in  addition,  interest  and  notary's  protest  fees. 

Indorsers  are  liable  in  the  order  in  which  they  indorse, 
but  evidence  may  be  admitted  to  show  that  they  have  agreed 
otherwise  as  between  or  among  themselves. 

§  180.     Discharge  of  Indorser 

If  the  holder  and  maker  agree  to  an  extension  of  the 
time  of  payment,  it  will  discharge  any  indorsers  of  the  instru- 


LIABILITY  OF  PARTIES  23 1 

ment.    Mere  delay  in  bringing  suit  does  not  have  this  effect. 

As  set  forth  in  subsequent  chapters,  failure  to  present  the 
note  for  payment  on  the  due  date  will  discharge  the  indorsers, 
and  if  the  note  is  presented  for  payment  and  not  paid,  the 
indorsers  must  be  duly  notified  if  they  are  to  be  held. 

§  181.    Liability  of  Guarantor 

If  instead  of  the  usual  Indorsement  or  indorsement  in 
blank,  a  guaranty  is  made,  as,  "For  value  received,  I  hereby 
guarantee  payment  of  within  note,  Warren  Colwell,"  the  effect 
is  that  the  guarantor  waives  the  usual  presentment  and  notice 
of  non-payment. 

Some  courts  hold  that  this  contract  of  guaranty  is  not 
strictly  negotiable  and  will  not  pass  to  any  but  the  next  holder. 
The  usual  form  of  indorsement  is  in  most  cases  preferable. 
A  guarantor  of  collection  instead  of  payment  is  liable  only 
if  the  maker  is  sued  promptly  and  then  cannot  by  legal  means 
be  made  to  pay. 

§  182.     Liability  of  Accommodation  Signer 

Accommodation  paper  is  distinguished  from  business  paper 
by  lack  of  consideration.  Thus  a  man  may  give  his  note  to 
a  friend,  in  order  that  the  latter  may  discount  it  and  so 
secure  funds  to  meet  a  temporary  emergency.  In  the  same 
way  he  may  write  his  acceptance  upon  a  draft  (see  §  205), 
or  indorse  a  note  made  by  a  friend  in  need  of  funds.  The 
distinction  is  often  made  between  real  instruments  and  ac- 
commodation paper  that  the  former  represent  past  and  the 
latter  future  transactions.  In  the  first  case,  a  man  gives  a 
note  for  goods  received;  in  the  second,  he  indorses  a  note  in 
order  that  its  maker  may  receive  goods. 

Since  the  one  who  is  accommodated  is  not  a  holder  for 
value,  he  cannot  sue  upon  accommodation  paper.  But  anyone 
who  for  accommodation  signs  his  name  to  any  negotiable 


232  NEGOTIABLE  INSTRUMENTS 

instrument  as  maker,  drawer,  acceptor,  or  indorser,  is  liable 
to  any  holder  for  value.  The  accommodation  signer  is  liable 
even  though  the  holder  knows  that  he  signed  for  accommoda- 
tion and  that  he  received  no  value.  But  an  accommodation 
signer  is  never  liable  to  the  party  accommodated. 


Review  Questions 

1.  Give  the  liability,  to  holder  in  due  course,  of  the  maker  and 

of  the  indorser  of  a  promissory  note. 

2.  What  is  the  effect  of  indorsement  of  a  negotiable  instrument 

in  this  form,  "Henry  Baldwin,  without  recourse"? 

3.  How  far  is  an  indorser  liable  when  the  maker  becomes  insolvent 

and  settles  with  his  creditors  for  50  cents  on  the  dollar? 

4.  What  action  of  the  holder  will  discharge  an  indorser?     What 

steps  must  be  taken  to  hold  indorsers? 

5.  A  deposits  grain  at  an  elevator  and  takes  a  negotiable  receipt 

which  he  sells  to  B.  Then  A  gets  the  grain  by  misrepre- 
sentation from  the  warehouseman  and  sells  to  C.  Would  B 
have  any  claim  on  C?     What  rights  would  B  have? 

6.  How    does   a   guarantor    of   negotiable    paper   differ    from   an 

indorser  ? 

7.  The  holder  of  a  demand  note  agreed  that  he  would  not  transfer 

the  note  or  put  it  in  the  bank  for  collection,  but  would  hold 
it  till  such  time  as  he  wanted  the  money,  and  would  then 
make  demand  for  it.  Upon  this  the  defendant,  at  the  maker's 
request,  indorsed  the  note.  The  plaintiff  forbore  suit  for  over 
two  years.  Is  the  indorser  liable?  State  the  legal  principle 
involved. 

8.  Directors  of  a  company  indorse  its  note  to  enable  it  to  make 

a  loan.  The  note  is  paid  by  the  first  indorser.  What  claim 
for  indemnity  has  he  against  the  subsequent  indorsers? 

9.  A  signs   what  he  thinks  is  a   subscription  blank   for   a  set  of 

books,  in  reality  the  paper  is  a  cleverly  contrived  promissory 
note.  This  note  is  negotiated.  It  passes  into  the  hands  of 
a  purchaser  for  value.  In  your  state  can  this  holder  force 
the  maker  to  pay  the  note? 


LIABILITY  OF  PARTIES  233 

10.  B  is  induced  to  buy  an  automobile  by  false  representation.    He 

gives  a  note  in  part  payment.  When  he  finds  that  he  has 
been  defrauded,  he  notifies  the  payee  that  he  will  not  pay 
the  note,  but  meanwhile  the  payee  has  negotiated  the  note  to 
another,  who  is  an  innocent  purchaser  for  value.  Can  the 
latter  force  B  to  pay  the  note? 

11.  C  dates  a  check  and  signs  his  name,  but  does  not  fill  out  the 

other  spaces.  The  check  is  stolen  and  filled  out  by  the  thief. 
It  passes  into  the  hands  of  an  innocent  party  who  pays  value. 
Will  that  party  be  able  to  collect  the  check  from  C? 


CHAPTER  XXXI 

PRESENTMENT  FOR  PAYMENT 

§  183.     Necessity  of  Presentment 

The  maker  or  acceptor  of  a  negotiable  Instrument  is  liable 
without  presentment  for  payment,  but  if  the  drawer  and  in- 
dorsers  are  to  be  held,  it  must  be  presented  for  payment. 

Presentment  must  be  made  on  the  due  date  except  in  the 
case  of  demand  paper  which  must  be  presented  within  a 
reasonable  time.  "Days  of  grace"  were  three  extra  days  which 
were  formerly  allowed  for  the  payment  of  commercial  paper. 

§  184.     Requirements  for  Presentment 

§  yz. — Presentment  for  payment,  to  be  sufficient,  must  be 
made : 

1.  By  the  holder,  or  by  some  person  authorized  to  re- 
ceive payment  on  his  behalf; 

2.  At  a  reasonable  hour  on  a  business  day; 

3.  At  a  proper  place  as  herein  defined; 

4.  To  the  person  primarily  liable  on  the  instrument,  or 
if  he  is  absent  or  inaccessible,  to  any  person  found  at  the 
place  where  the  presentment  is  made. 

§  73. — Presentment  for  payment  is  made  at  the  proper 
place : 

1.  Where  a  place  of  payment  is  specified  in  the  instru- 
ment and  it  is  there  presented; 

2.  Where  no  place  of  payment  is  specified,  but  the  ad- 
dress of  the  person  to  make  payment  is  given  in  the  instru- 
ment and  it  is  there  presented; 

3.  Where  no  place  of  payment  is  specified  and  no  address 
is  given  and  the  instrument  is  presented  at  the  usual  place 
of  business  or  residence  of  the  person  to  make  payment. 

234 


PRESENTMENT  FOR  PAYMENT  235 

4.  In  any  other  case  if  presented  to  the  person  to  make 
payment  wherever  he  can  be  found,  or  if  presented  at  his 
last  known  place  of  business  or  residence. 

§  74. — The  instrument  must  be  exhibited  to  the  person 
from  whom  payment  is  demanded,  and  when  it  is  paid  must 
be  delivered  up  to  the  party  paying  it. 

If  the  instrument  is  payable  at  a  bank,  presentment  must 
be  made  during  banking  hours  unless  payee  has  no  funds 
there,  in  which  case  any  hour  before  the  closing  of  the  bank 
will  do.  If  the  bank  holds  such  a  note  for  collection  and  it 
is  in  the  bank  on  its  due  date,  no  other  presentment  is  necessary. 

Speaking  generally,  it  is  the  bank's  duty  to  use  all  diligence 
in  respect  to  negotiable  paper  left  with  it  for  collection.  This 
involves  prompt  presentation  for  acceptance  if  acceptance  is 
necessary;  and  presentation  for  payment  on  the  date  of  pay- 
ment within  banking  hours,  at  the  place  specified  in  the  instru- 
ment, if  any,  and  if  not,  at  the  maker's  place  of  business. 
In  case  the  instrument  is  not  paid  on  presentation  when  due, 
it  is  the  bank's  duty  to  protest  it,  if  not  otherwise  instructed 
by  the  owner,  and  to  give  due  notice  of  its  dishonor  to  all 
indorsers,  and  to  do  any  other  things  necessary  for  the  col- 
lection of  the  instrument.  The  bank  is  liable  for  any  failure 
in  its  performance  of  its  duty. 

§  185.    Presentment  Excused 

§  82. — Presentment  for  payment  is  dispensed  with : 

1.  Where,  after  the  exercise  of  reasonable  diligence  pre- 
sentment as  required  by  this  act  cannot  be  made; 

2.  Where  the  drawee  is  a  fictitious  person ; 

3.  By  waiver  of  presentment,  express  or  implied. 

§  186.    When  Due 

§  85. — Every  negotiable  instrument  Is  payable  at  the  time 
fixed  therein  without  grace.  When  the  day  of  maturity  falls 
upon  Sunday  or  a  holiday,  the  instrument  is  payable  on  the 


236  NEGOTIABLE  INSTRUMENTS 

next  succeeding  business  day.  Instruments  falling  due  on 
Saturday  are  to  be  presented  for  payment  on  the  next  suc- 
ceeding business  day,  except  that  instruments  payable  on  de- 
mand may,  at  the  option  of  the  holder,  be  presented  for 
payment  before  twelve  o'clock  noon  on  Saturday  when  that 
entire  day  is  not  a  holiday. 

§  86. — Where  the  instrument  is  payable  at  a  fixed  period 
after  date,  after  sight,  or  after  the  happening  of  a  specified 
event,  the  time  of  payment  is  determined  by  excluding  the 
day  from  which  the  time  is  to  begin  to  run,  and  by  including 
the  date  of  payment. 

If  an  instrument  is  due  a  month  or  more  after  date,  a 
calendar  month  is  meant.  A  note  dated  February  16  and  due 
a  month  from  date  will  fall  due  on  March  16,  whether  in 
leap  year  or  any  other  year. 


Review  Questions 

1.  What  were  "days  of  grace"  as  understood  in  the  law  relating  to 

commercial  paper? 

2.  What  is  the  legal  effect  of  failure  to  make  presentment  for  pay- 

ment on  the  due  date  of  a  promissory  note? 

3.  What  is  a  bank's  liability  with  reference  to  negotiable  papers  left 

with  it  for  collection? 

4.  A  note  held  by  the  bank  at  which  it  is  payable  is  not  paid  at 

maturity.    Must  there  be  a  presentment  and  demand  of  pay- 
ment? 

5.  How  is  the  due  date  of  commercial  paper  determined?     What 

is  the  rule  if  the  due  date  falls  on  a  holiday?    On  a  Saturday? 

6.  How  should  presentment  be  made? 

7.  Why  is  the  maker  or  acceptor  liable  even  though  the  instrument 

is  not  presented  on  the  due  date? 

8.  Would  it  be  proper  under  any  circumstances  to  present  a  note 

for  payment  to  the  maker,  who  was  walking  along  the  street? 

9.  If  the  maker  cannot  be  found,  what  is  the  situation? 


CHAPTER  XXXII 

NOTICE  OF  DISHONOR 

§  187.    Necessity  of  Notice 

§  89. — Except  as  herein  otherwise  provided,  when  a  nego- 
tiable instrument  has  been  dishonored  by  non-acceptance  or 
non-payment,  notice  of  dishonor  must  be  given  to  the  drawer 
and  to  each  indorser,  and  any  drawer  or  indorser  to  whom 
such  notice  is  not  given  is  discharged. 

The  holder  must  give  notice.  If  the  note  has  been  left 
with  a  bank  for  collection,  it  as  agent  for  the  holder  would 
give  notice.  If  the  note  has  been  given  to  a  notary  for  protest, 
he  usually  gives  the  required  notice. 

§  188.    Effect  of  Notice 

§  92. — Where  notice  is  given  by  or  on  behalf  of  the  holder, 
it  enures  for  the  benefit  of  all  subsequent  holders  and  all 
prior  parties  who  have  a  right  of  recourse  against  the  party 
to  whom  it  is  given. 

§  93- — Where  notice  is  given  by  or  on  behalf  of  a  party 
entitled  to  give  notice,  it  enures  for  the  benefit  of  the  holder 
and  all  parties  subsequent  to  the  party  to  whom  notice  is 
given. 

§  189.    Form  of  Notice 

The  notice  may  be  informal  provided  it  is  so  clear  as  not 
to  mislead  the  party  to  whom  it  is  sent.  It  may  even  be  oral. 
It  may  be  delivered  personally  or  by  mail.  It  may  be  given 
to  the  party  or  to  someone  acting  as  his  authorized  agent. 

^^1 


238  NEGOTIABLE  INSTRUMENTS 

§  190.    Time  of  Notice 

Where  both  parties  reside  in  the  same  place,  the  time  when 
notice  must  be  given  is  as  follows: 

§  103. — I.  If  given  at  the  place  of  business  of  the  person 
to  receive  notice,  it  must  be  given  before  the  close  of  business 
hours  on  the  day  following; 

2.  If  given  at  his  residence,  it  must  be  given  before  the 
usual  hours  of  rest  on  the  day  following; 

3.  If  sent  by  mail,  it  must  be  deposited  in  the  post-office 
in  time  to  reach  him  in  usual  course  on  the  day  following. 

If  the  parties  reside  in  different  places,  the  rule  is  as 
follows : 

§104. — I.  If  sent  by  mail,  it  must  be  deposited  in  the 
post-office  in  time  to  go  by  mail  the  day  following  the  day  of 
dishonor,  or  if  there  be  no  mail  at  a  convenient  hour  on 
that  day,  by  the  next  mail  thereafter. 

2.  If  given  otherwise  than  through  the  post-office,  then 
within  the  time  that  notice  would  have  been  received  in  due 
course  of  mail,  if  it  had  been  deposited  in  the  post-office 
within  the  time  specified  in  the  last  subdivision. 

Where  a  notice  is  duly  deposited  in  the  post-office,  within 
the  specified  time,  it  is  deemed  a  good  notice,  whether  or  not 
it  reaches  its  destination. 

The  party  receiving  notice  is  allowed  the  same  period  of 
time  to  send  notice  to  antecedent  parties  that  was  permitted 
to  the  last  holder. 

§  191.    Where  to  Send  Notice 

If  the  party  has  given  an  address,  notice  should  be  sent 
there;  otherwise — 

§  108. — I.  Either  to  the  post-office  nearest  to  his  place 
of  residence,  or  to  the  post-office  where  he  is  accustomed  to 
receive  his  letters;  or 


NOTICE  OF  DISHONOR  2^0 

2.  If  he  lives  in  one  place,  and  has  his  place  of  business 
in  another,  notice  may  be  sent  to  either  place;  or 

3.  If  he  is  sojourning  in  another  place,  notice  may  be 
sent  to  the  place  where  he  is  so  sojourning. 

But  where  the  notice  is  actually  received  by  the  party 
within  the  time  specified  in  this  act,  it  will  be  sufficient, 
though  not  sent  in  accordance  with  the  requirements  of  this 
section. 

Delay  in  giving  notice  is  excused  when  caused  by  circum- 
stances beyond  the  control  of  the  holder. 

§  192.    When  Notice  Is  Not  Required 

Notice  of  dishonor  is  not  required  to  be  given  to  the  drawer 
in  the  following  cases: 

§  114. — I.  Where  the  drawer  and  drawee  are  the  same 
person ; 

2.  Where  the  drawee  is  a  fictitious  person  or  a  person 
not  having  capacity  to  contract ; 

3.  Where  the  drawer  is  the  person  to  whom  the  instru- 
ment is  presented  for  payment; 

4.  Where  the  drawer  has  no  right  to  expect  or  require 
that  the  drawee  or  acceptor  will  honor  the  instrument; 

5.  Where  the  drawer  has  countermanded  payment. 

§  193.    Protest 

A  protest  is  practically  a  certificate  by  a  notary  that  the 
instrument  has  been  presented,  a  demand  for  payment  made, 
and  such  demand  refused,  and  that  the  notary  has  protested 
against  such  non-payment  and  has  sent  notice  of  such  protest 
and  non-payment  to  the  party  concerned.  This  is  followed 
by  the  official  signature  and  seal  of  the  notary.  The  object 
of  protest  is  to  hold  those  secondarily  liable.  The  acceptor 
of  a  draft  and  the  maker  of  a  note,  are  principal  debtors  and 
are  held  with  or  without  protest. 

Foreign  bills  of  exchange  must  always  be  protested,  as 


240  NEGOTIABLE  INSTRUMENTS 

the  notary's  certificate  is  the  only  admissible  evidence  of  the 
bill's  dishonor. 

In  case  a  bank  protests  a  draft  ahead  of  time,  it  is  liable 
to  the  acceptor  for  injury  to  his  credit. 

Any  negotiable  instrument  may  be  protested  for  non-ac- 
ceptance or  non-payment,  but  such  procedure  is  not  legally 
required,  except  for  foreign  bills  of  exchange.  The  costs 
of  a  protest  are  added  to  the  amount  to  be  paid  by  any  party 
liable  on  the  instrument.  Fees  for  protest  are  fixed  by  statute. 
Protest  is  advisable,  as  the  notary  will  send  the  required  notice 
and  put  the  evidence  of  non-payment  and  due  notice  in  the 
best  possible  shape  for  use,  if  litigation  results. 

If  it  is  desired  to  avoid  the  expense  of  protest,  it  is 
necessary  to  attach  notice  of  "No  Protest"  to  any  instrument 
sent  through  a  bank  for  collection,  otherwise  the  bank  will 
give  its  notaries  a  chance  to  make  fees. 


Review  Questions 

1.  Notice  of  dishonor  is  to  be  given  by  whom?     To  whom  must 

notice  be  sent? 

2.  What  is  the  effect  if  notice  is  not  given? 

3.  What  is  the  rule  as  to  the  time  of  notice:  (a)  Where  the  parties 

live  in  the  same  place?     (b)   Where  they  reside  in  different 
places  ? 

4.  If  notice  was  sent  by  mail  and  owing  to  a  train  wreck  the  letter 

was  destroyed,  would  the  person  to  be  notified  be  released? 

5.  Who  pays  the  cost  of  protest?     What  does  the  term  "protest" 

mean? 

6.  E  holds  an  unpaid  note  and  gives  due  notice  to  fourth  indorser, 

who  gives  due  notice  to  second  indorser,  who  gives  due  notice 
to  first  and  third.    Who  are  liable  to  E? 

7.  What  form  of  negotiable  instruments  legally  require  protest  and 

for  what  defaults? 


CHAPTER  XXXIII 

DISCHARGE  OF  NEGOTIABLE  INSTRUMENTS 

§  194.     When  Discharged 

A  negotiable  instrument  is  discharged : 

§  119. — I.  By  payment  in  due  course  by  or  on  behalf  of 
the  principal  debtor; 

2.  By  payment  in  due  course  by  the  party  accommodated, 
where  the  instrument  is  made  or  accepted  for  accommoda- 
tion ; 

3.  By  the  intentional  cancellation  thereof  by  the  holder; 

4.  By  any  other  act  which  will  discharge  a  simple  con- 
tract for  the  payment  of  money; 

5.  When  the  principal  debtor  becomes  the  holder  of  the 
instrument  at  or  after  maturity  in  his  own  right. 

A  person  secondarily  liable  on  the  instrument  is  dis- 
charged : 

§120. — I.    By  an  act  which  discharges  the  instrument; 

2.  By  the  intentional  cancellation  of  his  signature  by 
the  holder; 

3.  By  the  discharge  of  a  prior  party; 

4.  By  a  valid  tender  of  payment  made  by  a  prior  party. 

Also  by  release  of  the  principal  debtor  or  by  extension  of 
his  time  of  payment.  Merely  letting  the  time  of  payment  go 
by  without  beginning  suit  is  not  granting  an  extension. 

§  195.    When  Not  Discharged 

When  paid  by  a  party  other  than  the  maker  or  drawee, 
the  instrument  is  not  discharged,  but  the  party  paying  it  may 
enforce  payment  against  all  prior  parties  on  the  instrument. 

241 


242  NEGOTIABLE  INSTRUMENTS 

§  196.    Effect  of  Alteration 

Any  material  alteration,  unless  made  with  the  assent  of 
all  parties  concerned,  will  invalidate  the  instrument,  except 
as  against  the  parties  who  made  the  alteration. 

Any  alteration  is  material  which  changes: 

§  125.— I.    The  date ; 

2.  The  sum  payable,  either  for  principal  or  interest; 

3.  The  time  or  place  of  payment; 

4.  The  number  or  the  relations  of  the  parties; 

5.  The  medium  or  currency  in  which  payment  is  to  be 
made; 

Or  which  adds  a  place  of  payment  where  no  place  of 
payment  is  specified,  or  any  other  change  or  addition  which 
alters  the  effect  of  the  instrument  in  any  respect,  is  a 
material  alteration. 


Review  Questions 

1.  How  is  liability  of   indorser  affected  when  maker  and  holder 

agree  to  extend  time  of  payment? 

2.  If  an  indorser  pays  a  note  to  avoid  suit,  what  rights  has  he? 

3.  An  instrument  which  has  been  materially  altered  is  in  due  course 

in  the  hands  of  a  holder  not  a  party  to  the  alteration.  May 
he  enforce  payment  according  to  original  tenor? 

4.  What  alterations  in  negotiable  instruments  are  material? 

5.  A  negotiable  note  executed  and  delivered  by  A  to  B  passes  in 

due  course  to  and  is  indorsed  in  blank  by  B,  C,  D,  and  E. 
F  is  the  last  holder  and  strikes  out  C's  indorsement.  What 
is  the  liability  of  C,  D,  and  E? 

6.  Under  what  circumstances  is  an  indorser  relieved  from  liability 

as  such? 


CHAPTER  XXXIV 

PROMISSORY  NOTES 

§  197.     Definition 

A  note  is  described  and  defined  by  the  Uniform  Negotiable 
Instruments  Law  as  follows: 

1.  It  is  a  written  promise  without  condition, 

2.  By  the  maker  to  another,  or  to  the  maker's  order, 

3.  To  pay  a  sum  certain  in  money  to  order  or  to  bearer, 

4.  On  demand  at  a  fixed  or  determinable  future  time. 

§  184. — A  negotiable  promissory  note  within  the  meaning 
of  this  act  is  an  unconditional  promise  in  writing  made  by 
one  person  to  another,  signed  by  the  maker,  engaging  to 
pay  on  demand  or  at  a  fixed  or  determinable  future  time  a 
sum  certain  in  money  to  order  or  to  bearer.  Where  a  note 
is  drawn  to  the  maker's  own  order,  it  is  not  complete  until 
indorsed  by  him. 

§  198.     Liability  of  Maker 

The  liability  of  the  maker  of  a  promissory  note  may  vary 
in  nine  different  ways  as  follows:  ^ 

1.  Where  the  note  is  signed  with  his  name  by  another 

at  his  direction,  he  is  liable  in  the  same  manner 
as  though  he  had  personally  signed  the  note. 

2.  Where  he  signs  and  delivers  the  note  without  con- 

sideration to  the  party  who  seeks  to  enforce  it, 
he  is  not  liable  if  he  raises  the  question  and  prop- 
erly makes  the  defense  of  lack  of  consideration. 


'  C.  p.  A.  Problems,  Vol.  I,  page  235.  This  diflFerentiation  of  liability  is  far- 
fetched and  even  fantastic.  It  is  brought  in  here  only  because  required  to  answer 
a  question  actually  asked. 


244  NEGOTIABLE  INSTRUMENTS 

3.  Where  he  signs  and  deHvers  the  note  without  con- 

sideration and  it  subsequently  comes  into  the  hands 
of  a  holder  in  due  course,  he  is  liable. 

4.  Where  his  signature  is  forged  by  the  party  who  seeks 

to  enforce  it,  he  is  not  liable. 

5.  Where  his  liability  is  sought  to  be  enforced  by  one 

to  whom  it  was  negotiated  for  value  by  the  party 
forging  his  signature,  he  may  set  up  that  the  in- 
strument was  forged  even  against  a  holder  in  due 
course. 

6.  Where  the  instrument  sued  on  is  not  dated,  does  not 

state  that  it  is  given  for  value,  and  does  not 
specify  the  place  where  it  is  drawn  or  the  place 
where  it  is  payable,  he  is  liable. 

7.  Where  the  holder  of  the  note  has,  without  the  assent 

of  the  maker,  changed  its  date,  he  is  not  liable 
on  the  note  either  in  its  present  or  its  original 
form.    Alteration  of  date  is  a  material  alteration. 

8.  Where  the  holder  of  the  note  has,  without  the  assent 

of  the  maker,  changed  its  place  of  payment,  he  is 
not  liable.  Place  of  payment  is  a  material  term 
of  the  note. 

9.  Where  the  holder  of  the  note  has  unintentionally 

marked  it  cancelled,  he  is  liable,  provided  the 
holder  can  prove  that  the  cancellation  was  unin- 
tentional.   The  burden  of  proof  is  on  the  holder. 

§  199.     Interest 

The  holder  of  a  note  on  which  interest  is  payable  at  fixed 
periods  need  not  protest  or  take  any  action  in  case  of  default 
of  interest  payments.  He  may  simply  wait  until  the  principal 
is  due  and  then  proceed  to  collect  the  whole  amount  of  the 
note. 


PROMISSORY  NOTES  245 

The  legal  rate  of  interest  at  the  place  where  payment  is 
to  be  made  will  determine  the  rate  if  not  specified  in  the 
note. 

§  200.     Demand  Notes 

If  an  indorser  on  a  demand  note  is  to  be  held,  payment 
must  be  demanded  within  a  reasonable  time;  the  maker  will 
be  bound  even  if  demand  is  not  made  for  a  very  long  time. 
The  only  limitation  protecting  the  maker  is  that  imposed  by 
the  Statute  of  Limitations.  It  is  held  that  the  statute  begins 
to  run  from  the  time  a  cause  of  action  accrues.  In  the  case 
of  a  demand  note,  this  is  from  the  time  the  note  is  delivered 
by  the  maker  to  the  payee. 

§  201.     Effect  of  Renewal 

If  a  new  note  is  taken  In  exchange  for  an  unpaid  one, 
it  operates  only  as  a  suspension  of  the  old  debt,  not  as  an 
extinguishment  of  it,  unless  by  special  agreement.  In  case 
the  new  note  is  not  met,  the  old  note  may  be  sued  upon.  This 
is  true  whether  or  not  the  old  note  is  retained  by  the 
creditor. 

§  202.     Note  as  a  Gift 

If  a  gift  is  made  of  a  promissory  note  payable  to  the 
order  of  the  donee,  and  he  should  indorse  it  and  transfer  it 
to  an  innocent  holder  for  value,  it  would  be  good.  The  donee 
could  not  collect  by  suit  himself  because  he  would  be  met 
by  the  defense  of  no  consideration. 

If  the  note  were  made  payable  to  the  donor's  order  and 
he  indorsed  it  in  blank,  the  immediate  party  who  received  it 
and  gave  no  value  in  return  could  not  enforce  payment  of  the 
note. 


246  NEGOTIABLE  INSTRUMENTS 

Review  Questions 

1.  If  a  note  is  given  to  A  and  the  donor  dies,  can  A  collect?    If 

A  has  discounted  the  note  at  the  bank  can  the  bank  collect? 

2.  What  are  the  essentials  of  a  promissory  note? 

3.  The  holder  of  a  demand  note  failed  to  present  it  for  two  years. 

Then  the  maker  had  vanished.    Could  the  holder  collect  from 
the  indorsers? 

4.  What  are  nine  different  ways  in  which  a  note  may  be  issued 

or  handled,  and  the  varying  liabilities  of  the  maker  in  each 
case? 


CHAPTER  XXXV 

BILLS  OF  EXCHANGE  AND  ACCEPTANCES^ 

§  203.     Definition 

§  126. — A  bill  of  exchange  is  an  unconditional  order  in 
writing  addressed  by  one  person  to  another,  signed  by  the 
person  giving  it,  requiring  the  person  to  whom  it  is  ad- 
dressed to  pay  on  demand  or  at  a  fixed  or  determinable 
future  time  a  certain  sum  in  money  to  order  or  to  bearer. 

An  inland  bill  is  one  drawn  and  payable  within  the  state. 
Any  other  is  a  foreign  bill.  A  bill  of  exchange  when  accepted 
becomes  an  acceptance. 

A  draft  is  an  order  to  pay  money — it  includes  bills  of 
exchange,  checks  and  all  other  forms  of  orders  to  pay  money. 

§  204.    Liability  of  Maker,  Drawer,  and  Acceptor 

The  maker  of  a  draft  is  called  the  drawer.  He  is  anal- 
ogous to  the  maker  of  a  note.  The  maker  of  a  promissory 
note  engages  to  pay  the  note  he  issues  according  to  its  tenor 
and  admits  the  existence  of  the  payee  and  his  capacity  to 
indorse.  The  drawer  of  a  draft  assumes  the  same  liability, 
if  it  is  not  paid  by  the  drawee  and  the  necessary  proceedings 
on  dishonor  are  taken.  A  draft  may  be  presented  to  the 
drawee  before  payment  to  make  sure  that  he  will  accept  its 
obligations. 

§  205.    Acceptance 

§  132. — The  acceptance  of  a  bill  is  the  signification  by  the 
drawee  of  his  assent  to  the  order  of  the  drawer.  The 
acceptance  must  be  in  writing  and  signed  by  the  drawee.    It 


'  For   forms  see   Chapter  GUI,   Forms  42-44. 

247 


248  NEGOTIABLE  INSTRUMENTS 

must  not  express  that  the  drawee  will  perform  his  promise 
by  any  other  means  than  the  payment  of  money. 

An  acceptance  is  an  engagement  to  pay  a  bill  of  exchange 
as  requested  by  the  drawer.  An  acceptance  is  usually  accord- 
ing to  the  tenor  of  the  bill,  in  which  case  it  is  called  a  general 
or  absolute  acceptance. 

Qualified  Acceptance.  A  qualified  acceptance  is  sometimes 
given. 

§141. — An  acceptance  is  quahfied  which  is: 

1.  Conditional;  that  is  to  say,  which  makes  payment  by 
the  acceptor  dependent  on  the  fulfillment  of  a  condition 
therein  stated; 

2.  Partial ;  that  is  to  say,  an  acceptance  to  pay  part  only 
of  the  amount  for  which  the  bill  is  drawn; 

3.  Local;  that  is  to  say,  an  acceptance  to  pay  only  at  a 
particular  place; 

4.  Qualified  as  to  time; 

5.  The  acceptance  of  some  one  or  more  of  the  drawees, 
but  not  of  all. 

The  holder  may  require  that  the  acceptance  be  written  on 
the  bill.  It  should  not  be  written  on  another  piece  of  paper. 
The  drawee  has  twenty-four  hours  to  decide  whether  he  will 
accept  or  not.  If  he  destroys  the  bill  or  fails  to  return  it,  he 
will  be  held  to  have  accepted  it. 

Mode  of  Acceptance.  Upon  presentation  of  the  bill  of 
exchange,  the  drawee,  if  he  wishes  to  pay  the  order  according 
to  its  terms,  may  do  so  by  writing  across  its  face  the  word 
"Accepted,"  followed  by  signature  and  date.  When  this  is 
done  by  the  drawee  he  becomes  the  acceptor,  and  thereby 
agrees  to  pay  the  bill  at  maturity,  according  to  its  tenor,  with- 
out qualifying  conditions. 

Effect  of  Acceptance.  The  effect  of  the  acceptance  of 
a  bill  of  exchange  is  to  constitute  the  acceptor  the  principal 
debtor.     The  bill  of  exchange  becomes,  by  the  acceptance, 


BILLS  OF  EXCHANGE  AND  ACCEPTANCES  249 

similar  to  a  promissory  note — the  acceptor  being  the  promissor, 
and  the  drawer  standing  in  the  relation  of  an  indorser  or 
surety. 

§  206.     Dollar  Acceptance 

By  the  term  "dollar  acceptance,"  as  used  in  international 
trade,  is  meant  an  accepted  bill  of  exchange  drawn  in  Ameri- 
can dollars.  The  term  has  become  familiar  in  this  country 
since  the  enactment  of  and  amendments  to  the  federal  reserve 
banking  law,  which  created  a  system  of  modern  bills  of 
exchange  for  American  business.  Prior  to  the  establishment 
of  this  system,  it  was  the  usual  custom  to  draw  bills  of 
exchange  in  pounds  sterling.  Most  of  the  international  trade 
was  financed  through  London;  that  is  to  say,  financial  in- 
stitutions of  London  granted  to  traders  acceptance  credits 
which  authorized  the  drawing  of  bills  of  exchange  on  such 
institutions.  By  this  agreement,  the  trader  was  assured  that 
the  London  bank  would  accept  his  bill.  Thus,  such  institutions 
lent  their  credit,  for  which  they  charged  a  commission,  and 
a  merchant  in  London  or  even  in  South  America  would  deal 
with  both  his  creditors  and  his  debtors  in  this  country  in 
terms  of  pounds  sterling. 

Under  the  amendment  of  September  7,  1916,  to  the  Fed- 
eral Reserve  Act,  in  addition  to  the  power  to  accept  bills 
involved  in  the  exportation  and  the  importation  of  goods, 
federal  reserve  banks  have  the  power  to  accept  bills  drawn 
upon  them  by  foreign  banks  or  bankers  in  the  same  way  that 
London  banks  accommodate  foreign  traders.  The  reserve 
banks  may  accept  drafts  or  bills  of  exchange  drawn  upon 
them,  having  not  more  than  three  months  to  run,  exclusive 
of  days  of  grace,  drawn  under  regulations  to  be  prescribed 
by  the  Federal  Reserve  Board,  by  banks  or  bankers  in  foreign 
countries  or  dependencies  or  insular  possessions  of  the  United 
States,  for  the  purpose  of  furnishing  dollar  exchange  as  re- 


250  NEGOTIABLE  INSTRUMENTS 

quired  by  the  usages  of  trade  in  the  respective  countries, 
dependencies,  or  insular  possessions. 

It  is  likely  that  in  years  to  come  New  York  will  be  as 
important  financially  and  commercially  as  London;  and,  as 
the  use  of  a  decimal  currency  has  much  to  recommend  it, 
there  is  good  reason  to  believe  that  the  future  will  see  dollar 
exchange  more  generally  used  than  sterling  exchange  has  been 
in  the  past.  It  is  certain  that  every  business  man  should  under- 
stand clearly  what  is  meant  by  "dollar  acceptances,"  and  its 
synonyms  "dollar  exchange,"  and  "dollar  credits,"  as  the 
terms  are  used  by  bankers. 

§  207.    Bank  Acceptances 

Under  the  federal  reserve  law,  member  banks  of  the  fed- 
eral reserve  system  are  empowered  to  grant  bankers'  accept- 
ance credits;  that  is  to  say,  "Any  member  bank  may  accept 
drafts  or  bills  of  exchange  drawn  upon  it  and  growing  out 
of  transactions  involving  the  importation  or  exportation  of 
goods  having  not  more  than  six  months'  sight  to  run,"  ^  A 
bankers'  acceptance,  as  defined  by  the  Federal  Reserve  Board, 
"is  a  bill  of  exchange  of  which  the  acceptor  is  a  bank  or  trust 
company,  or  a  firm,  person,  company,  or  corporation  engaged 
in  the  business  of  granting  bankers'  acceptance  credits." 

When  the  bank,  trust  company,  firm,  person  or  corpora- 
tion, accepts  the  bill  of  exchange,  it  has  loaned  its  credit,  not 
its  funds.  The  direct  responsibility  for  the  payment  of  the 
bill  of  exchange  that  has  become  an  acceptance,  rests  on  the 
bank  or  concern  granting  the  acceptance  credit.  Such  accepted 
bills  of  exchange  are  payable  in  our  country  and  hence  are 
known  as  "dollar  acceptances." 

§  208.     Domestic  Bank  Acceptances 

The  rules  of  the  Federal  Reserve  Board  are  somewhat 
more  rigid  with  regard  to  bank  acceptance  credits  covering 

>f  13  of  the  Federal  Reserve  Act. 


BILLS  OF  EXCHANGE  AND  ACCEPTANCES  251 

domestic  shipments.  Such  acceptances  are  used  mainly  to 
finance  domestic  transactions  involving  major  staples.  And 
the  federal  reserve  law  provides  that  "Any  member  bank 
(of  the  federal  reserve  system)  may  accept  drafts  or  bills 
of  exchange  drawn  upon  it,  having  not  more  than  six  months' 
sight  to  run,  exclusive  of  days  of  grace  ....  which  grow  out 
of  transactions  involving  the  domestic  shipment  of  goods,  pro- 
vided shipping  documents^  conveying  or  securing  title  are 
attached  at  the  time  of  acceptance;  or  which  are  secured  at 
the  time  of  acceptance  by  a  warehouse  receipt  or  other  such 
document  conveying  or  securing  title  covering  readily  market- 
able staples." 

Such  acceptances  are  known  as  dollar  acceptances  against 
domestic  shipment  of  goods,  or  domestic  bank  acceptances. 

§  209.     Trade  Acceptances 

In  this  country  most  of  the  credit  business  has  been  done 
on  the  open-account  system  whereby  goods  are  sold  at  thirty, 
sixty,  or  ninety  days,  or  in  many  cases  without  any  definite 
time  of  payment.  This  system  has  many  disadvantages.  It 
compels  the  seller  to  carry  the  financial  burden  of  the  buyer 
and  so  ties  up  his  capital  for  an  indefinite  period.  Also,  the 
expense  involved  in  collecting  slow  accounts  and  granting 
extensions  constitutes  in  the  aggregate  a  heavy  tax  on  business. 
All  these  disadvantages  are  eliminated  by  the  use  of  the  trade 
acceptance. 

A  trade  acceptance  is  a  bill  of  exchange  drawn  by  the 
seller  directly  on  the  purchaser  of  goods,  and  accepted  by  the 
purchaser.  The  direct  responsibility  for  the  payment  of  the 
bill  rests  on  the  person,  firm  or  corporation  accepting  the  bill 
of  exchange.     The  Federal  Reserve  Board  has  defined  the 


'  "ShippitiR  documents"  arc  all  the  documents  required  to  prove  title  to  the  ship- 
ments— the  bill  of  lading,  insurance  policy,  consular  invoice,  and  so  on.  Principles 
of  Foreign  Trade.     Savay,   page  306. 


S52  NEGOTIABLE  INSTRUMENTS 

trade  acceptance  as  a  "bill  of  exchange,  drawn  by  the  seller 
on  the  purchaser,  of  goods  sold  and  accepted  by  such  pur- 
chaser." 

Functions  of  the  Trade  Acceptance.  Trade  acceptances 
are  instruments  of  credit,  and  when  properly  created  are 
eligible  for  purchase  by  federal  reserve  banks.  They  thus 
add  to  the  circulating  medium,  just  as  do  eligible  bank  ac- 
ceptances. 

The  extensive  use  of  the  trade  acceptance  in  American 
business  is  urged  as  a  remedy  to  cure  the  defects  of  the  open- 
account  system,  as  it  provides  the  seller  with  an  instrument 
which  he  may  sell  to  his  bank,  broker,  or  other  persons  en- 
gaged in  discounting  such  commercial  paper,  thus  enabling 
him  to  keep  liquid  and  mobile  the  capital  that  would  otherwise 
be  tied  up  in  open  book  accounts. 

§  210.     The  Discount  of  Acceptances 

Under  Section  14  of  the  federal  reserve  banking  law,  and 
under  rules  and  regulations  prescribed  by  the  Federal  Reserve 
Board,  federal  reserve  banks  may  purchase  and  sell  in  the 
open  market  bankers'  acceptances  and  bills  of  exchange  from 
banks,  firms,  corporations,  or  individuals. 

It  should  be  borne  in  mind  that  federal  reserve  banks 
proper  do  not  "accept"  bills  of  exchange,  but  may  purchase 
acceptances  in  the  open  market  (discount  them),  or  may 
rediscount  eligible  acceptances  for  member  banks. 

§  211.     Rules  for  Discount  of  Bank  Acceptances 

§  182. — A  bankers'  acceptance  may  be  discounted  with  any 
federal  reserve  bank,  under  the  following  rules  prescribed 
by  the  Federal  Reserve  Board: 

1.  The  acceptance  must  have  maturity  at  purchase  of 

not  more  than  three  months. 

2.  The  bill  must  have  been  drawn  under  credit  opened 


BILLS  OF  EXCHANGE  AND  ACCEPTANCES  253 

for  the  purpose  of  taking  care  of  transactions  in- 
volving 

(a)  Foreign  shipment  of  goods, 

(b)  Shipment  within  United  States,  provided  bill 

is  accompanied  by  shipping  documents,  or 

(c)  Storage  within  United  States  of  readily  mar- 

ketable goods,  provided  acceptor  is  secured 
by  proper  receipt,  or 

(d)  Storage  within  United  States  of  goods  ac- 

tually sold,  provided  the  bill  is  secured  by 
pledge  of  such  goods. 
3.     Or   the  bill   must  be   drawn  by   a   foreign  bank  or 
banker   for  the  purpose  of   furnishing  dollar  ex- 
change. 

§  212.     Rules  for  Discount  of  Trade  Acceptances 

Federal  reserve  banks  may  purchase  trade  acceptances 
under  the  following  rules  prescribed  by  the  Federal  Reserve 
Board : 

The  bill  must  have  arisen  out  of  an  actual  commercial 
transaction,  domestic  or  foreign;  that  is,  it  must  be  a  bill 
which  has  been  issued  or  drawn  for  agricultural,  industrial, 
or  commercial  purposes  or  the  proceeds  of  which  have  been 
used  or  are  to  be  used  for  the  purpose  of  producing,  purchas- 
ing, carrying  or  marketing  goods  in  one  or  more  of  the 
steps  of  the  process  of  production,  manufacture  or  distribu- 
tion. It  must  have  a  maturity  at  time  of  purchase  of  not 
more  than  ninety  days,  exclusive  of  days  of  grace. 

The  word  "goods"  has  been  construed  as  meaning  goods, 
wares,  merchandise  and  all  agricultural  products  including  live 
stock. 

§  213.    The  Drawee 

The  drawee  is  not  liable  unless  and  until  he  accepts  the 
bill.  A  bill  may  be  addressed  to  two  or  more  drawees,  but 
not  in  the  alternative,  or  in  succession. 


254  NEGOTIABLE  INSTRUMENTS 

Where  drawer  and  drawee  are  the  same  person,  or  the 
drawee  is  fictitious,  or  where  the  instrument  is  ambiguous, 
the  holder  may  consider  the  instrument  either  a  promissory 
note  or  a  bill  of  exchange  at  his  option. 

§  214.     Presentment  for  Acceptance 

Presentment  for  acceptance  must  be  made: 

§  143. — I.  Where  the  bill  is  payable  after  sight  or  in  any 
other  case  where  presentment  for  acceptance  is  necessary  in 
order  to  fix  the  maturity  of  the  instrument;  or 

2.  Where  the  bill  expressly  stipulates  that  it  shall  be 
presented  for  acceptance;  or 

3.  Where  the  bill  is  drawn  payable  elsewhere  than  at 
the  residence  or  the  place  of  business  of  the  drawee. 

In  no  other  case  is  presentment  for  acceptance  necessary 
in  order  to  render  any  party  to  the  bill  liable. 

Presentment  for  acceptance  follows  the  general  rules  given 
for  presentment  for  payment.     (See  Chapter  XXXI.) 

§  215.     Protest  for  Non- Acceptance 

A  foreign  bill  appearing  on  its  face  to  be  such  must  be 
protested  on  the  day  of  its  dishonor  by  non-acceptance,  if  the 
owner  desires  to  hold  the  drawer  and  indorsers. 

§  153. — The  protest  must  be  annexed  to  the  bill,  or  must 
contain  a  copy  thereof,  and  must  be  under  the  hand  and  seal 
of  the  notary  making  it,  and  must  specify : 

1.  The  time  and  place  of  presentment; 

2.  The  fact  that  presentment  was  made  and  the  manner 
thereof ; 

3.  The  cause  or  reason  for  protesting  the  bill ; 

4.  The  demand  made  and  the  answer  given,  if  any,  or 
the  fact  that  the  drawee  or  acceptor  could  not  be  found. 

§  154. — Protest  may  be  made  by: 

1.  A  notary  public;  or 

2.  By  any  respectable  resident  of  the  place  where  the 


BILLS  OF  EXCHANGE  AND  ACCEPTANCES  255 

bill  is  dishonored,  in  the  presence  of  two  or  more  creditable 
witnesses. 

§  157. — A  bill  which  has  been  protested  for  non-accept- 
ance may  be  subsequently  protested  for  non-payment. 

Acceptance  for  Honor.  An  outside  party  may  accept  or 
pay  a  bill  of  exchange  to  save  the  credit  of  the  drawee.  In 
such  case  the  acceptor  makes  himself  liable,  and  if  he  must 
pay  the  bill,  he  has  a  right  to  be  reimbursed  by  the  person 
who  should  have  paid  it. 

A  bill  payable  in  a  foreign  country  would  be  protested 
according  to  the  law  of  that  country,  and  not  according  to  the 
law  of  the  place  where  the  bill  was  made. 

§  216.    Bills  in  a  Set 

§  177. — Where  a  bill  is  drawn  in  a  set,  each  part  of  the 
set  being  numbered  and  containing  a  reference  to  the  other 
parts,  the  whole  of  the  parts  constitute  one  bill. 

In  such  a  case,  the  acceptance  should  be  written  on  one 
of  the  sets  and  on  one  part  only.  If  the  drawee  accepts 
more  than  one  part,  he  may  be  held  liable  on  each  part  as 
if  it  were  a  separate  bill. 

Usually,  "where  any  one  part  of  a  bill  drawn  in  a  set  is 
discharged  by  payment  or  otherwise,  the  whole  bill  is  dis- 
charged." 

When  the  acceptor  of  a  bill  drawn  in  a  set  pays  it  with- 
out requiring  the  part  bearing  his  acceptance  to  be  delivered 
up  to  him,  and  the  part  at  maturity  is  outstanding  in  the 
hands  of  a  holder  in  due  course,  he  is  liable  to  the  holder 
thereon. 


2S6  NEGOTIABLE  INSTRUMENTS 

Review  Questions 

1.  What  is  a  bill  of  exchange?    An  inland  bill?     A  foreign  bill? 

An  acceptance?    A  draft? 

2.  What  is  a  general  acceptance?    A  qualified  acceptance?     What 

is  the  form  of  acceptance?     Its  effect? 

3.  What   is   meant  by  "dollar   acceptances"?     Why  is  the  term 

significant  ? 

4.  What   is   a   "bankers'   acceptance"   as   defined   by   the   Federal 

Reserve  Board?  What  is  necessary  to  make  a  bankers'  ac- 
ceptance eligible  for  discount  at  a  federal  reserve  bank? 

5.  What  are  domestic  bank  acceptances? 

6.  What  are  trade  acceptances  ?    What  are  their  functions  ?    What 

is  necessary  to  make  a  trade  acceptance  eligible  for  discount 
at  a  federal  reserve  bank? 

7.  When   is  presentment   for   acceptance   of   a  bill   of   exchange 

necessary?    What  is  the  effect  if  such  a  bill  is  not  presented? 

8.  What  must  protest  of  a   foreign  bill   of  exchange  specify   in 

order  to  hold  drawer  and  indorsers?  Who  can  protest  a 
bill?  Must  a  bill  payable  in  a  foreign  city  be  protested  by 
the  law  of  the  place  where  it  is  payable  or  by  our  Negotiable 
Instruments  Law? 

9.  When  bills  are  drawn  in  a  set,  what  is  the  duty  of  the  acceptor? 
ID.     When  must  bills  of  exchange  be  presented  for  acceptance? 

II.    What  is  the  rule  as  to  protest  of  foreign  bills  of  exchange? 


CHAPTER  XXXVI 

BANK  CHECKS 

§217.    Definition 

A  check  may  be  defined  as  an  unconditional  order  on  a 
bank  or  a  banker  to  pay  on  demand  a  specified  sum  to  a  person 
named  or  to  his  order,  or  to  the  bearer. 

§  185. — A  check  is  a  bill  of  exchange  drawn  on  a  bank, 
payable  on  demand.  Except  as  herein  otherwise  provided, 
the  provisions  of  this  act  applicable  to  a  bill  of  exchange 
payable  on  demand  apply  to  a  check. 

§  218.     Checks  as  Evidence  of  Payment 

At  the  present  time  bank  checks  are  used  extensively  as 
a  substitute  for  cash  payments.  Few  business  men  pay  bills 
except  by  check.  If  actual  money  had  to  be  constantly  in 
transfer  from  one  persoji  to  another,  it  would  limit  the  amount 
of  business  that  could  be  done  at  one  time  as  the  volume 
of  cash  in  circulation  is  not  adequate.  The  use  of  checks 
is  an  elastic  medium  of  exchange  that  meets  any  possible 
demand  of  modern  business. 

The  use  of  checks  for  the  payment  of  debts  affords  the 
very  best  possible  evidence  of  the  fact  of  payment.  A  check 
given  to  pay  a  debt  can  only  be  cashed  by  the  Indorsement 
of  the  recipient,  and  his  indorsement  is  the  best  evidence  that 
he  received  the  check  and  collected  the  money.  This  important 
function  has  been  amplified  in  modern  accounting  by  the  use 
of  voucher  checks,  A  voucher  check  contains  a  clear  state- 
ment of  the  exact  obligation  that  the  check  is  intended  to 

257 


258  NEGOTIABLE  INSTRUMENTS 

pay.  Anyone  who  accepts  a  check  with  the  statement  on  the 
check  of  the  purpose  to  which  the  payment  is  to  be  appHed 
is  estopped  thereafter  from  applying  the  payment  to  any  other 
obligation  or  indebtedness.  These  checks  are  found  in  many 
forms. 

The  chief  difference  between  an  ordinary  bill  of  exchange 
and  a  check  is  that  the  latter  is  always  drawn  on  a  bank  and 
is  always  payable  on  demand.  In  addition,  these  points  of 
difference  are  to  be  noted: 

1.  Grace  is  not  allowed  on  a  check. 

2.  The  check  must  be  drawn  on  funds  actually  in  the 

bank. 

3.  The  death  of  the  drawer  of  a  check  revokes  it. 

§  219.     Signature  of  Drawer 

The  signature  of  the  drawer  is  necessary,  but  it  need  not 
be  placed  at  the  bottom  of  the  instrument.  The  order  may 
be  written  under  the  signature,  or  some  form  such  as  "I, 
Henry  Adams,  direct  you  to  pay  to,  etc.,"  may  be  used.  The 
bank  will  have  the  signature  on  file  and  will  be  able  to  verify 
it  in  whatever  form  it  occurs. 

§  220.     Presentment  for  Payment 

§  186. — A  check  must  be  presented  for  payment  within  a 
reasonable  time  after  its  issue  or  the  drawer  will  be  dis- 
charged from  liability  thereon  to  the  extent  of  the  loss 
caused  by  the  delay. 

Thus  if  the  holder  keeps  the  check  two  weeks,  and  the 
bank  fails  before  the  check  is  presented,  the  liability  of  the 
drawer  will  be  reduced  in  proportion  to  his  total  loss.  That 
is,  if  the  bank  paid  depositors  only  forty  cents  on  the  dollar, 
the  holder  of  the  check  would  be  able  to  get  only  40  per  cent 
of  its  amount  from  the  drawer.     The  courts  will  hold  that 


BANK  CHECKS  259 

the  other  60  per  cent  was  lost  to  the  holder  by  his  own  un- 
reasonable delay.  That  is,  the  drawer  is  discharged  from  his 
liability  to  the  holder  only  to  the  extent  of  the  actual  loss 
caused  by  the  delay. 

If  the  check  must  be  sent  to  another  place  for  collection, 
it  should  be  started  on  the  day  following  its  receipt,  and 
should  go  by  a  reasonably  direct  route.  In  some  states  it  has 
been  held  that  unreasonable  delay  is  caused  by  sending  a  check 
over  an  indirect  foute  through  various  correspondent  banks. 

§221.     Bank's  Relations  with  Depositor 

The  depositor  in  effect  lends  money  to  the  bank,  and  the 
bank  promises  to  repay  it  on  demand.  The  bank  is  in  no  sense 
a  trustee,  unless  there  has  been  an  express  agreement  to  that 
effect. 

The  bank  may  charge  against  a  depositor's  account  any 
notes  of  his  which  it  holds  and  which  are  due.  If  the  depositor 
has  made  an  overdraft,  the  bank  may  apply  subsequent  deposits 
against  it.  A  bill  or  note  made  payable  at  a  bank  authorizes 
the  bank  to  pay  it  when  due  out  of  the  depositor's  account. 

If  the  funds  of  a  depositor  on  hand  are  not  enough  to 
pay  a  check  in  full,  the  bank  need  not  pay  it  in  part,  but  it 
may  legally  do  so. 

If  the  bank  wrongfully  refuses  payment  of  a  check,  the 
drawer  may  sue  for  damages.  If  he  is  a  business  man  and 
can  prove  that  his  credit  has  actually  been  injured,  he  may 
recover  a  substantial  sum. 

In  general  practice,  a  bank  does 'not,  except  by  special 
arrangement,  take  checks  of  depositors  for  collection,  but 
accepts  them  outright  for  deposit.  By  this  method  the  de- 
positor is  able  to  draw  checks  against  his  deposits  without 
waiting  until  the  bank  has  made  sure  that  they  can  be  collected. 
On  the  other  hand,  if  the  depositor  does  not  wait  a  reasonable 
time  for  the  collection  of  the  checks  he  has  deposited  before 


26o  NEGOTIABLE  INSTRUMENTS 

drawing  against  them,  the  bank  may  legally  refuse  to  honor 
his  checks. 

If  a  depositor  gives  a  check  dated  some  days  ahead  and 
it  is  presented  to  the  bank  before  its  date,  the  bank  will  pay 
it  or  certify  it  at  its  own  peril, 

§  222.     Bank's  Relations  with  Holder 

§  189. — A  check  of  itself  does  not  operate  as  an  assign- 
ment of  any  part  of  the  funds  to  the  credit  of  the  drawer 
with  the  bank,  and  the  bank  is  not  liable  to  the  holder  unless 
and  until  it  accepts  or  certifies  the  check. 

The  holder  of  an  uncertified  check  has  ordinarily  no  rights 
against  the  bank.  If  the  bank  refuses  to  pay  when  it  has 
funds  of  the  drawer  on  hand,  the  depositor  may  sue  the  bank 
for  damages  to  his  credit,  but  the  holder's  recourse  is  only 
against  the  drawer  of  the  check. 

Even  if  the  bank  knows  that  the  check  was  given  for  an 
illegal  consideration,  as  in  payment  of  a  wager,  the  bank  must 
cash  it,  and  the  drawer  will  have  no  claim  against  the  bank 
for  so  doing.  The  bank  will  pay  checks  in  the  order  of 
their  presentment.  If  two  or  more  checks  are  presented  at 
the  same  time,  the  bank  may  pay  in  whatever  order  it 
pleases. 

§  223.    Revocation 

The  drawer  has  the  right  to  stop  payment  on  a  check, 
and  if  the  bank  pays  the  check  after  it  has  been  notified  not 
to  do  so,  it  will  be  liable.  The  drawer  alone  has  a  legal  right 
to  order  payment  stopped,  but  a  subsequent  indorser  who 
knows  of  fraud  ought  to  inform  the  bank  at  once  if  he  cannot 
reach  the  drawer.  In  such  a  case  the  bank  will  probably 
delay  payment  of  the  check  until  the  matter  has  been 
cleared  up. 

Even  though  the  drawer  is  successful  in  stopping  payment 


BANK  CHECKS  261 

of  a  check,  he  will  be  liable  to  an  innocent  holder  for  value 
if  the  indorsements  are  proper. 

After  a  check  has  been  certified,  payment  may  not  or- 
dinarily be  stopped. 

The  death  of  the  drawer  will  revoke  a  check,  but  the  bank 
must  have  notice,  on  the  general  principle  that  agency  ceases 
only  after  the  agent  has  received  notice.  Insolvency,  when 
the  bank  is  notified  of  it,  also  acts  as  a  revocation. 

§  224.     Certification 

When  a  bank  certifies  a  check,  it  assumes  the  obligation 
formerly  held  by  the  drawer.  The  bank  will  not  certify  unless 
it  accepts  the  signature  of  the  drawer  as  correct,  and  unless 
it  has  funds  of  the  drawer  on  hand  with  which  to  pay;  and 
as  soon  as  it  certifies  it  sets  aside  the  proper  amount  from  the 
drawer's  account  and  holds  it  for  the  holder  of  the  check. 
Under  the  Negotiable  Instruments  Law  certification  must  be 
in  writing.  There  is  no  legal  obligation  on  a  bank  to  certify 
any  check  for  anybody.  It  is  a  matter  of  courtesy  and  con- 
venience. 

§  187. — Where  a  check  is  certified  by  the  bank  on  which 
it  is  drawn,  the  certification  is  equivalent  to  an  acceptance. 

§  188. — Where  the  holder  of  a  check  procures  it  to  be 
accepted  or  certified,  the  drawer  and  all  indorsers  are  dis- 
charged from  liability  thereon. 

Acceptance  or  certification  of  a  check  discharges  the 
drawer,  but  if  the  drawer  takes  his  own  check  to  the  bank 
for  certification,  he  still  remains  secondarily  liable,  in  case  the 
certification  be  refused  for  any  reason,  or  the  bank  becomes 
insolvent. 

If  a  bank  becomes  insolvent,  the  holder  of  a  certified  check 
simply  ranks  among  the  other  creditors. 


262  NEGOTIABLE  INSTRUMENTS 

§  225.    Fraud 

The  bank's  agreement  with  the  depositor  is  that  it  will 
pay  out  money  on  his  account  only  on  his  order.  If  it  honors 
a  forged  signature,  therefore,  it  must  bear  the  loss.  But  in 
New  York,  if  a  bank  is  not  notified  within  one  year  after 
the  return  of  a  forged  or  raised  check  it  cannot  be  held  liable. 
The  bank's  liability  is  to  the  drawer,  not  to  the  payee  or 
subsequent  indorsers. 

The  drawer  cannot  hold  the  bank  for  a  loss  if  he  has  been 
negligent  in  drawing  the  check  or  has  delivered  the  check  to 
the  wrong  person,  or  if  he  has  signed  and  allowed  to  go  into 
circulation  a  check  with  unfilled  blanks,  or  if  he  has  so 
negligently  filled  in  a  check  that  insertions  might  readily  be 
made.  The  depositor  should  always  examine  his  pass-book 
and  vouchers  carefully,  and  report  promptly  any  errors  he  may 
discover.  The  bank  will  not  be  liable  to  a  drawer  whose  acts 
amount  to  acquiescence  in  what  the  bank  has  done. 

If  a  raised  check  is  paid  by  a  bank,  it  must  bear  the  loss 
as  against  the  drawer,  unless  his  negligence  in  filling  in  the 
amounts  made  possible  the  forgery.  As  against  the  person  to 
whom  the  money  has  been  paid,  the  bank  must  bear  the  loss 
unless  he  was  a  party  to  the  forgery  or  unless  he  can  return 
the  money  to  the  bank  without  making  his  situation  worse 
than  it  would  have  been  had  the  bank  refused  payment.  That 
is,  if  the  payee  has  not  yet  done  anything  that  he  would  not 
have  done  if  payment  had  been  refused,  the  bank  may  recover. 
In  most  cases,  however,  he  will  have  delivered  goods,  given 
up  security  or  otherwise  have  done  something  that  he  would 
not  have  done  if  the  bank  had  refused  payment. 

If  the  amount  is  altered  and  the  bank  pays  out  money  in 
good  faith,  it  will  be  able  to  recover  from  the  one  who  got 
the  money.  Even  in  case  of  alteration  before  certification, 
the  bank  will  be  able  to  recover  from  the  one  to  whom  payment 
was  made.    In  case  a  check  is  raised  after  certification,  if  the 


BANK  CHECKS  263 

bank's  carelessness  was  not  responsible  for  the  alteration  or 
the  payment,  it  will  be  able  to  recover  the  excess  paid  from 
an  innocent  holder  to  whom  it  paid  the  raised  amount.  Re- 
covery is  allowed  in  these  cases  because  the  bank  is  not  sup- 
posed to  warrant  the  body  of  the  instrument  by  certifying  it, 
but  only  the  drawer's  signature,  the  sufficiency  of  the  funds, 
the  existence  of  the  payee  and  his  capacity  to  indorse.  In 
New  York  and  Pennsylvania  the  bank's  certification  is  a 
warrant  only  of  the  signature  and  the  funds. 

The  bank  after  certifying  a  check  will  be  liable  to  a  holder 
in  good  faith,  even  though  the  funds  are  insufficient  or  the 
signature  is  forged.  It  will  be  liable  also  to  such  a  holder 
even  though  the  payee  is  fictitious  or  the  blanks  fraudulently 
filled.  If  a  certified  check  has  been  stolen  or  lost,  even  though 
advertised,  a  holder  in  good  faith  will  be  able  to  recover. 

An  overdraft  is  not  usually  a  criminal  offense.  If  a  man 
draws  a  check  out  with  intent  to  defraud  and  with  knowledge 
that  he  has  no  right  to  draw  on  the  bank  for  the  amount  he 
does,  he  is  guilty  of  stealing  and  is  punishable  accordingly. 

§  226.    Checks  as  Gifts 

If  a  check  is  given  as  a  present,  it  will  be  valid,  and  sub- 
ject to  the  defense  of  no  consideration  only  as  between  the 
donor  and  donee.  A  check  given  as  a  gift  causa  mortis 
if  not  cashed  or  certified  before  the  death  of  the  donor,  is 
revoked. 


Review  Questions 

1.  Prepare  a  voucher  check  which  is  a  negotiable  instrument  and 

evidence  of  the  payment  of  a  particular  account  or  obligation. 

2.  What  liability,  if  any,  does  a  bank  assume  in  paying  a  check  to 

a  holder  who  claims  under  a  forged  indorsement? 

3.  The  maker  of  a  promissory  note  sends  the  payee  his  check  for 

the  amount  on  the  day  of  maturity.    The  payee  has  the  check 


264  NEGOTIABLE  INSTRUMENTS 

certified  at  the  bank,  but  before  it  is  paid  the  bank  fails.  Is 
the  maker  relieved  of  liability  on  the  note  by  such  certification  ? 
Give  reasons  for  your  answer. 

4.  A  bank  certified  a  check  that  had  been  altered  by  changing  the 

date,  name  of  payee,  and  raising  the  amount,  and  the  bank 
subsequently  paid  the  same  to  the  defendant.  Thereafter, 
the  bank  sued  the  defendant  for  the  amount  thus  paid.  Can 
it  recover?  Or  does  its  certification  of  the  check  amount 
to  a  w^arranty  of  the  genuineness  of  the  body  of  the  check 
as  to  payee  or  amount?    Explain. 

5.  Is  a  depositing  and  checking  customer  of  a  bank  obliged  to 

verify  the  balance  shown  by  pass-book  and  vouchers? 

6.  A  retailer  received  a  check  for  some  goods.    Before  delivering 

them  he  telephoned  the  bank,  and  was  told  that  the  check 
was  good.  When  he  presented  it  for  payment  several  hours 
later  he  found  that  other  checks  had  been  presented  in  the 
interval,  and  that  the  bank  refused  to  honor  his  on  the 
ground  of  insufficient  funds  in  the  depositor's  account.  Could 
the  retailer  rely  on  the  telephoned  approval  of  the  bank  as 
a  certification? 

7.  How  should  a  check  be  sent  by  mail  for  collection?    May  the 

holder  of  an  uncertified  check  sue  the  bank?  If  a  bank 
wrongfully  dishonors  a  check,  has  the  drawer  any  remedy? 

8.  What  is  the  liability  of  the  parties  to  a  certified  check?    If  a 

bank  pays  a  check  drawn  on  it  by  a  depositor,  after  payment 
has  been  stopped,  can  the  depositor  recover  the  amount  so 
paid? 

9.  In  your  state  what  is  the  statutory  limitation  to  a  bank's  liability 

for  payment  of  a  forged  or  raised  check  after  its  return  to 
a  depositor?  Liability  of  a  bank  for  payment  of  a  check 
after  drawer's  death? 

10.  Drawer  of  check  has  it  certified,  gives  it  to  payee.    Next  day 

bank  fails.    Can  payee  collect  from  drawer? 

11.  On  the  morning  of  January  5,  A  gave  B  a  check  for  $100  on 

account.  On  the  evening  of  January  7  the  bank  suspends 
payment.  B  has  not  yet  presented  the  check.  Is  A's  debt 
cancelled  ? 


PART  VI 
INSURANCE 


CHAPTER  XXXVII 

FIRE  INSURANCE 

§  227.     The  Parties 

Insurance  is  a  contract  by  one  or  more  parties  to  indemnify 
another  for  some  loss  which  he  may  suffer  in  the  future.  If 
there  is  no  loss,  the  agreement  does  not  have  to  be  carried  out. 
The  consideration  is  the  premium  paid.  The  written  contract 
is  called  the  policy. 

Insurance  is  of  various  kinds.  Fire,  life,  and  marine  in- 
surance are  the  oldest  forms  of  insurance.  In  addition,  there 
have  grown  up  accident  insurance,  burglary  insurance,  boiler, 
plate  glass,  and  tornado  insurance,  credit,  fidelity,  title,  and 
liability  insurance,  and  other  special  forms  of  insurance  too 
numerous  to  mention. 

There  are  two  parties  to  a  contract  of  fire  insurance,  the 
insured  and  the  insurer.  The  person  whose  property  is  insured 
is  called  the  insured.  The  person  or  company  who  insures  it 
is  called  the  insurer. 

The  insurer  may  be  a  single  individual,  or  a  corporation, 
or  an  unincorporated  company ;  or  a  group  of  individuals  may 
get  together  and  insure  themselves.  This  last  system  of  in- 
surance is  called  mutual  insurance.  It  is  quite  common  in 
the  country  districts,  where  there  may  be  a  township  mutual 
insurance.  Whenever  a  fire  occurs  all  the  members  of  the  fund 
are  assessed  proportionately  to  pay  the  loss. 

In  the  non-mutual  companies  a  fund  is  created  by  the  pay- 
ment of  premiums,  out  of  which  the  insurer  pays  for  the 
losses  which  may  occur. 

267 


268  INSURANCE 

§  228.    Nature  of  the  Contract 

The  contract  of  fire  insurance  is  a  speculative  one;  that 
is  to  say,  the  event  on  the  happening  of  which  the  payment  is 
to  be  made,  namely,  the  fire,  may  never  happen.  The  person 
insuring  the  building  must  himself  have  some  actual  financial 
interest  in  the  property  insured,  otherwise  it  would  amount 
merely  to  a  bet  on  his  part  as  to  whether  the  building  would 
be  destroyed  by  fire  or  not,  and  would  be  a  gambling  contract 
and  illegal.  Also  if  the  insured  had  no  interest  in  the  building, 
and  the  building  were  destroyed  by  fire,  it  would  be  to  his 
profit,  and  such  an  inducement  might  lead  to  crime. 

Note: 

I .  The  exact  interest  of  the  person  insured  in  the  prop- 
erty should  always  be  made  a  part  of  the  policy, 
to  show  that  the  contract  is  legal. 

§  229.    Agents 

Most  insurance  is  taken  out  through  agents.  These  may 
be  of  two  kinds:  those  who  are  paid  by  the  company  and  are 
the  agents  of  the  company,  and  those  who  act  merely  as 
brokers  and  solicit  insurance  for  various  companies.  Agents 
acting  for  the  company  bind  the  company  by  their  agreements 
if  they  have  the  power  to  close  contracts  of  insurance.  If  the 
contract  is  required  to  be  sent  first  to  the  company  for  its 
approval,  any  agreement  of  the  agent  will  not  bind  the  com- 
pany. Sometimes,  by  means  of  a  short  written  agreement 
called  a  binder,  or  even  by  an  oral  contract,  an  agent  may 
bind  his  company  for  a  certain  limited  or  contingent  period, 
as  for  instance,  until  the  policy  is  made  out  or  while  the 
company  is  investigating  the  risk. 

The  laws  of  the  various  states  are  very  strict  with  regard 
to  insurance  agents.  In  most  of  them  an  agent  must  receive 
a  license  from  the  state  superintendent  of  insurance,  or  what- 


FIRE  INSURANCE  269 

ever  officer  exercises  corresponding  duties,  in  order  to  be 
permitted  to  act. 

Notes: 

1.  In  dealing  with  an  insurance  agent,  always  find  out 

whether  the  company  has  to  approve  his  agree- 
ments before  relying  on  any  changes  he  offers  to 
make  in  the  policy,  etc.  It  is  always  safer  to  get 
the  authorization  of  the  company  itself. 

2.  If  you  wish  to  act  as  an  insurance  agent,  look  up 

the  law  to  see  if  you  must  take  out  a  license. 

3.  If  you  deal  through  a  broker  instead  of  an  agent  of 

the  insurance  company,  the  broker  is  your  agent. 

§  230.    The  Policy 

Policies  may  be  either  open  or  valued.  Most  fire  insurance 
policies  are  open.  In  an  open  policy  the  amount  payable  in 
case  of  loss  is  not  fixed  by  the  policy  but  merely  the  limit 
up  to  which  the  company  will  be  liable.  Then  when  a  fire 
occurs  the  company  pays  the  actual  value  of  the  loss  up  to 
the  amount  named  in  the  policy.  A  valued  policy,  on  the 
other  hand,  specifies  the  amount  payable  in  the  event  of  a  total 
loss.    Life  insurance  policies  are  valued. 

It  is  a  legal  maxim  that  "to  include  is  to  exclude"  and  the 
insurance  policy  covers  only  what  is  stated  therein.  Some 
states  allow  oral  agreements  with,  or  representations  made 
by,  agents  to  be  proved  in  order  to  alter  the  policy,  but  others 
do  not.  If  it  is  desired  to  make  other  agreements  not  included 
in  the  policy  form,  they  may  be  made  in  written  form  and 
made  a  part  of  the  policy  by  referring  to  them  in  the  policy. 

Standard  Forms  of  Policies.  New  York,  Massachusetts, 
and  some  other  states  have  a  standard  form  of  policy,  which 
by  law  must  be  used  by  all  insurance  companies.  Massachu- 
setts adopted  this  form  in  1881 ;  New  York  in  1887.  The 
Massachusetts  form  provides  that  a  building  must  not  be  left 


2  70  INSURANCE 

unoccupied  for  thirty  days  or  the  insurance  will  lapse.  In  New 
York  it  must  not  be  left  for  over  ten  days.  In  addition,  the 
New  York  form  contains  certain  stipulations,  including  the 
following : 

The  company  may  replace  or  repair  the  property  instead 
of  paying  the  loss  and  may  take  damaged  property  by  paying 
the  full  appraised  value  for  it.  It  does  not  hold  itself  liable 
under  certain  circumstances,  such  as  war  or  riot,  usurped 
power,  or  destruction  by  order  of  civil  or  military  authority; 
likewise  it  is  released  by  the  neglect  of  the  insured  to  use  all 
reasonable  means  to  save  his  property  when  it  is  menaced  by 
neighboring  flames.  It  is  not  liable  if  the  insured  made  any 
false  representations  or  practiced  any  kind  of  fraud  in  pro- 
curing the  contract.  The  policy  does  not  cover  such  things 
as  deeds,  book  accounts,  and  shares  of  stock,  etc.,  which  merely 
represent  obligations  to  the  insured,  nor  does  it  cover  money. 
It  does  not  cover  a  building  after  it  or  part  of  it  has  fallen 
from  any  cause  other  than  fire.  These  provisions  may  not 
be  altered. 

If  a  building  is  left  vacant  for  ten  days,  or  a  factory  runs 
after  ten  o'clock  at  night  or  is  shut  down  for  more  than  ten 
consecutive  days,  the  policy  becomes  of  no  effect,  unless  the 
policyholder  shall  have  obtained  a  permit  from  the  insurance 
company.  This  permit  must  be  in  proper  form  and  must 
be  attached  to  the  policy.  Any  changes  in  the  use  or 
occupation  of  a  building,  or  the  installation  of  such  things 
as  electrical  wires,  gasoline  stoves,  etc.,  must  be  consented  to 
by  the  company  or  the  policy  is  void.  In  the  absence  of  a 
provision  to  that  effect,  a  policy  is  not  nullified  by  the  erection 
of  neighboring  buildings  that  increase  the  risk. 

A  common  clause,  known  as  "builder's  risk"  provides  that 
mechanics  such  as  gasfitters,  plumbers,  etc.,  may  not  be  en- 
gaged to  work  upon  a  building  without  the  consent  of  the 
company. 


FIRE  INSURANCE  271 

For  the  use  or  storage  of  inflammable  or  explosive  sub- 
stances, such  as  paint  and  gunpowder,  in  an  insured  building, 
a  special  permit  is  necessary. 

The  policy  does  not  cover  certain  enumerated  articles, 
such  as  jewelry,  curios,  office  furniture,  architects'  plans,  etc., 
unless  they  are  expressly  mentioned  in  the  policy. 

What  the  Policy  Should  Include.  Every  policy  of  fire  in- 
surance should  include  as  full  and  accurate  a  description  of 
the  property  covered  as  possible.  It  should  also  include  the 
amount  for  which  the  insurance  is  taken  out,  the  term  for 
which  the  policy  is  to  last,  the  rate  of  premiums  and  at  what 
time  payable,  and  any  other  conditions  which  the  parties  wish 
to  make  a  part  of  the  agreement.  Personal  property  must  be 
described  as  located  at  such  and  such  a  place;  and  if  it  is 
moved,  a  new  policy  must  be  taken  out  or  the  original  policy 
extended  to  cover  it,  as  the  character  of  the  building  in  which 
it  is  kept  affects  the  risk  very  materially. 

Cancellation.  A  fire  insurance  policy  may  be  cancelled  by 
either  party  upon  five  days'  notice ;  a  proportionate  amount  of 
the  premium  paid  being  returned  to  the  insured  when  the  com- 
pany makes  such  cancellation. 

Notes: 

1.  Everything  you   want  included   in  the   agreement 

should  be  put  in  writing  and  incorporated  in  the 
policy. 

2.  If  the  policy  is  a  standard  policy  and  the  company's 

permission  is  obtained  to  make  any  changes  in  it, 
these  should  be  in  writing  and  made  a  part  of  the 
policy  by  a  reference  in  it  to  the  changes. 

§  231.    Premiums 

The  premiums  are  the  consideration  the  Insured  pays  for 
the    agreement    to    insure    his    property.      They    are    based 


272  INSURANCE 

on  a  certain  percentage  of  the  amount  for  which  the  property 
is  insured  and  are  payable  periodically,  generally  either  annu- 
ally or  semiannually.  A  failure  to  pay  a  premium  when  it  is 
due  causes  the  policy  to  lapse  and  be  forfeited,  but  the  com- 
pany may  consent  to  an  extension  of  the  time  for  its  payment 
or  may  agree  to  take  notes  for  the  payment  of  premiums. 

Note: 

I.  If  an  extension  of  time  is  procured  for  the  payment 
of  a  premium,  it  is  safest  to  have  it  in  writing. 
Make  your  application  for  the  extension  by  letter, 
retain  copy,  and  enclose  postage  for  a  reply.  The 
company's  letter  will  be  your  protection. 

§  232.     The  Property  Insured 

The  property  insured  may  be  either  real  or  personal.  A 
policy  may  cover  both,  as  for  instance  a  dwelling-house  and 
furniture.  A  policy  made  out  to  cover  "merchandise"  or 
"household  goods"  will  cover  such  as  may  be  acquired  later 
as  well  as  those  which  the  insured  owns  at  the  time  of  taking 
out  the  policy. 

Insurable  Interest.  The  party  who  insures  a  property  must 
have  what  is  known  as  an  insurable  interest  in  it.  He  may 
either  own  the  property  outright,  or  have  some  claim  upon  it, 
such  as  a  lien  or  mortgage.  The  standard  form  of  policy  in 
New  York  provides  that  the  insured  must  be  the  sole  and 
absolute  owner  of  the  property,  free  from  any  claims  of  anyone 
else,  but  anyone  who  is  not  the  sole  and  absolute  owner  may 
insure  his  interest  with  the  company's  consent. 

If  a  mortgagee  or  trustee  wishes  to  take  out  a  policy,  a 
clause  must  be  inserted  that  the  loss  shall  be  payable  "as  his 
interest  may  appear."  The  company's  consent  must  also  be 
obtained  to  a  chattel  mortgage,  or  the  policy  will  be  void. 

A  man  who  insures  another's  property  has  an  insurable  in- 
terest therein  and  may  protect  himself  by  reinsuring  it. 


FIRE  INSURANCE  273 

A  man  may  have  an  insurable  interest  in  property  which 
he  does  not  own  at  all.  Thus  a  salaried  agent  whose  employ- 
ment is  contingent  upon  the  continued  existence  of  a  given 
property,  may  insure  it.  But  the  value  of  his  indirect  interest 
must  somehow  be  determined  and  agreed  to  by  the  insurer  and 
the  insured.  In  like  manner,  a  stockholder  of  a  corporation 
has  an  interest,  real  though  difficult  to  determine,  in  the  prop- 
erty of  the  corporation. 

Alienation.  Any  change  in  ownership  or  possession  of 
property,  including  sale  for  taxes  or  under  a  lien,  will  make 
it  necessary  to  assign  immediately  the  policy  to  the  new  owner, 
unless  he  chooses  to  take  out  a  new  policy.  Assignment  must 
be  with  the  consent  of  the  insurance  company  and  recorded  on 
the  company's  books. 

What  May  Be  Insured.  Any  kind  of  tangible  property 
may  be  insured.  Deeds,  bonds,  shares  of  stock,  book  accounts, 
bank  notes,  promissory  notes,  and  bills  of  exchange,  etc.,  are 
not  insurable.  These  merely  represent  an  interest  which  the 
party  has  in  some  property  and,  if  they  are  destroyed,  the 
claim  may  be  proved  by  witnesses  without  them.  Money  may 
not  be  insured ;  the  United  States  Treasury  will  redeem  what 
remains  of  it. 

What  May  Be  Insured  Against.  A  fire  insurance  policy 
insures  for  damages  other  than  those  caused  by  actual  flames. 
Injury  due  to  the  heat  of  a  fire  in  an  adjoining  building  would 
be  recompensed,  as  would  also  damage  caused  by  the  means 
used  to  extinguish  a  fire,  or  damage  caused  by  removing  the 
goods  to  a  place  of  safety  even  though  it  later  developed 
that  such  moving  need  not  have  been  done.  To  insure 
against  damage  by  lightning  where  there  was  no  actual 
ignition,  a  special  lightning  clause  must  be  attached  to  the 
policy. 

Floating  Stock.  A  merchant  may  insure  his  stock  with  the 
understanding  that  it  is  to  be  replaced  by  other  material  of  the 


274  INSURANCE 

same  kind.  His  policy  would  be  known  as  a  floating  one,  and 
in  case  of  damage,  he  may  recover  on  the  stock  on  hand  when 
the  fire  occurred,  regardless  of  what  stock  was  on  hand  when 
the  policy  was  issued. 

Coinsurance.  A  coinsurance  clause  stipulates  that,  in  re- 
turn for  a  reduced  rate,  the  insured  must  insure  his  property 
up  to  a  certain  percentage  of  its  value,  usually  80  per  cent, 
and  if  he  fails  in  so  doing  he  must  himself  bear  a  proportion 
of  any  loss,  thus  making  him  ?  coinsurer  with  the  company 
of  his  own  property. 

For  instance,  if  his  property  were  worth  $10,000,  an  80  per 
cent  coinsurance  clause  would  obligate  him  to  carry  insurance 
to  the  amount  of  $8,000.  If  he  carried  only  $6,000  and  a  loss 
occurred,  he  would  be  paid  only  such  a  proportion  of  his  loss  as 
the  insurance  he  carried  bore  to  the  amount  he  agreed  to  carry, 
in  this  case  three-fourths.  Therefore,  if  fire  damaged  his 
property  to  the  extent  of  $4,000,  he  would  receive  only  three- 
fourths  of  this  amount,  or  $3,000. 

Reinsurance.  For  the  better  distribution  of  risks,  a  com- 
pany after  writing  a  policy  often  insures  itself  for  the  whole 
or  a  part  of  the  risk  it  has  just  insured.  If  then,  the  original 
insurer  has  to  pay,  the  reinsurer  is  liable  to  the  insurer  for 
the  amount  paid,  or  for  the  proportionate  part  of  it,  as  may 
have  been  agreed.  The  insurer  may  not  reinsure  for  more 
than  the  original  policy.  The  amount  to  be  paid  by  the  rein- 
surer is  the  amount  the  insurer  has  to  pay,  or  a  part  of  it, 
with  one  exception.  If  the  reinsurer  pays  the  claim  of  the 
insurer  before  the  claim  of  the  insured  is  settled,  then  it  does 
not  matter  to  the  reinsurer  what  terms  the  insurer  makes  with 
the  insured.  If  the  insurer  becomes  insolvent,  makes  a  final 
settlement  and  is  discharged,  he  will  receive  from  his  reinsurer 
only  what  he  paid.  But  when  the  insured  has  been  paid  off, 
then  the  other  creditors  can  have  no  claim  on  what  is  due 
the  insurer  from  the  reinsurer  unless  the  reinsurance  has  been 


FIRE  INSURANCE  275 

taken  into  account  in  making  the  calculations  of  dividends 
under  which  the  insured  was  paid. 

Notes: 

1.  In  changing  the  location  of  personal  property  always 

be  sure  to  take  out  a  new  policy. 

2.  In  buying  buildings  of  any  kind,  the  first  thing  to  do 

is  to  arrange  for  their  insurance. 

3.  A  person  living  in  a  house  for  which  he  is  paying 

by  instalments  has  an  insurable  interest  in  it. 

§  233.    Warranties  and  False  Representations 

False  representations  are  misstatements  made  to  the  com- 
pany and  its  agents  when  applying  for  the  policy,  or  after- 
wards as  to  any  change  in  the  condition  of  the  property  of 
which  the  company  has  a  right  to  know.  If  such  misstate- 
ments materially  affect  the  policy  they  will  render  it  void. 

Concealment  is  the  suppression  of  any  material  facts  which 
the  insurer  does  not  know  or  is  not  presumed  to  know.  Such 
suppression  may  be  of  the  fact  at  the  time  application  is  made 
or  of  some  later  change  in  the  condition  which  the  insurer 
ought  to  know. 

Any  fact  is  material  that  might  properly  influence  the 
insurer  in  taking  or  refusing  the  risk  or  that  would  affect 
the  amount  of  the  premium  charged. 

Warranties  are  representations  which  are  included  in  the 
policy.  They  may  consist  in  answers  to  a  schedule  of  questions 
which  are  attached  to  the  policy  and  made  a  part  of  it.  If  any 
of  the  warranties  are  false  the  policy  is  of  no  value.  Even  an 
inaccurate  statement  made  through  an  honest  mistake,  if  it  is 
made  a  part  of  the  policy,  renders  it  useless. 

Other  Insurance.  Misstatements  as  to  other  insurance 
where  the  policy  is  of  the  standard  form  will  render  it  of  no 
effect  whether  they  are  warranties  or  mere  representations. 


276  INSURANCE 

Increasing  the  insurance  on  the  property  increases  the  tempta- 
tion to  be  careless  or  to  have  "accidental"  fires,  and  the  law  is 
strict  that  the  company  must  know  of  and  consent  to  insurance 
on  the  property  in  any  other  company.  Where  a  property  is 
covered  by  policies  in  different  companies,  any  one  insurer  is 
liable  only  for  the  proportion  of  the  loss  that  his  policy  bears 
to  the  total  amount  of  insurance. 

Notes: 

1.  Be  very  careful  to  make  only  the  most  accurate 

statements  in  answer  to  any  schedule  of  questions 
to  be  filled  out  in  making  application  for  the 
policy.  If  these  statements  are  wrong,  and  the 
schedule  is  attached  to  and  made  a  part  of  the 
policy,  your  policy  may  be  of  no  value. 

2.  To  conceal  matters  material  to  the  risk  may  avoid 

the  policy. 

§  234.     Settlement  of  Losses 

When  a  loss  occurs  the  insured  must  at  once  notify  the 
company  and  then  make  out  an  inventory  of  the  damaged 
property,  stating  the  value  of  each  article  separately.  This  in- 
ventory must  be  sworn  to.  The  New  York  standard  policy 
gives  the  company  the  option  to  require  that  it  be  confirmed  by 
the  certificate  of  a  magistrate  or  of  a  notary  public.  In  this 
inventory  the  insured  must  state  if  there  are  any  other  claims 
against  the  property;  or,  if  it  is  partly  owned  by  others,  who 
they  are  and  what  is  their  interest  in  it,  and  what,  to  the  best 
of  his  knowledge,  was  the  cause  of  the  fire. 

The  company  usually  sends  out  an  adjuster  to  investigate 
the  loss.  He  must  be  shown  all  the  damaged  property  and 
any  papers  relating  to  its  value,  or  plans,  specifications,  etc., 
which  would  aid  in  determining  the  value  of  the  property 
destroyed.     The  insured  must  be  ready  to  submit  to  any  ex- 


FIRE  INSURANCE  277 

aminations  which  the  company  may  wish  to  make  and  to  make 
any  relevant  affidavits  it  may  require. 

If  the  insured  and  the  company  cannot  agree  on  the  amount 
necessary  to  cover  the  loss,  the  company  and  the  insured  each 
appoint  one  appraiser  and  the  two  go  over  the  property  and 
value  it.  They  select  an  umpire  who  decides  between  them  in 
case  there  is  any  dispute  as  to  the  proper  valuation.  Their 
decision  settles  the  amount  which  the  company  is  liable  to  pay. 

A  mortgagee  has  the  right  to  recover  from  the  insurance 
company  whatever  is  due  him  under  the  mortgage  at  the  time 
of  the  damage,  provided  of  course  the  face  of  the  policy  covers 
the  amount  due  and  that  the  policy  bears  the  customary  mort- 
gagee clause.  This  right,  however,  does  not  run  with  the 
land.  That  is,  if  the  mortgagor  sells  the  property  subject  to 
the  mortgage,  the  buyer,  who  assumes  the  mortgage,  may 
insure  it  without  the  mortgagee's  having  any  interest  in  the 
policy.  But  if  the  buyer  insures  it,  making  the  loss  payable 
to  the  mortgagee,  he  may  not  revoke  or  cancel  the  insurance 
without  the  mortgagee's  consent.  In  the  same  way,  if  a  policy 
taken  out  by  the  owner,  is  made  payable  to  the  mortgagee 
as  his  interest  may  appear,  his  rights  cannot  be  destroyed 
by  any  act  of  the  owner.  If  the  owner  assumes  to  accept  a 
settlement  of  a  claim  without  the  mortgagee's  consent,  he  will 
not  be  bound  by  it. 

Options  Which  the  Company  May  Exercise.  Under  the 
standard  policy  in  New  York,  the  company  has  the  right  to 
replace  or  repair  the  property  instead  of  paying  for  the  loss. 
Or  it  may  take  the  property  on  paying  the  appraised  value  for 
it.  If  the  property  is  capable  of  being  repaired,  the  company 
pays  only  the  amount  which  is  adjudged  necessary  to  restore 
it  to  its  former  condition. 

If  the  insured  has  any  claims  against  persons  other  than 
the  company  for  the  value  of  the  property,  he  must  transfer 
them  to  the  company  when  he  is  paid  the  amount  adjudged 


278  INSURANCE 

proper  to  cover  the  loss,  and  the  company  may  sue  and  collect 
on  the  other  claims. 

Notes: 

1.  It  is  wiser  to  leave  property  in  its  damaged  condition 

after  a  fire  until  the  adjuster  arrives.  But  if  there 
is  danger  of  its  becoming  more  damaged  by  being 
left,  it  should  be  removed  to  a  place  of  safety. 
The  insured  should  take  every  precaution  to  keep 
the  loss  as  \ov^  as  possible. 

2.  Be  sure  to  include  everything  in  the  inventory  and 

to  state  its  full  value.  It  will  be  very  difficult  to 
prove  any  greater  value  afterwards. 


Review  Questions 

1.  What  is  a  contract  of  insurance? 

2.  Why  must  the  person  insuring  have  an  interest  in  the  property 

insured?    Has  a  mortgagee  an  insurable  interest? 

3.  What  is  the  difference  between   an  insurance  broker  and   an 

insurance  agent? 

4.  What  is  the  distinction  between  an  open  and  a  valued  policy? 

5.  What  occurrences  may  invalidate  a  policy? 

6.  What  phrase  is  used  if  a  mortgagee  insures  property?     What 

will  be  the  extent  of  the  mortgagee's  recovery  if  the  mortgage 
had  been  reduced  before  the  fire  occurred? 

7.  A  notice  of  the  premium  due  is  sent  to  the  insured  with  no 

mention  of  a  penalty  for  failure  to  pay.  Does  policy  lapse 
if  payment  is  tendered  one  month  late  and  refused  by  the 
company  ? 

8.  What  is  the  meaning  of  an  80  per  cent  clause  in  a  fire  insurance 

contract  or  policy,  and  what  would  be  the  cash  settlement 
by  the  insurance  company  in  case  the  property  insured  inven- 
toried at  the  time  of  the  fire  $150,000  but  was  insured  for 
only  $100,000?  What  would  be  the  settlement  if  the  property 
insured  inventoried  only  $75,000  but  was  insured  for  $100,000? 


FIRE  INSURANCE  279 

9.     What  representations  are  material  ?    What  is  a  concealment  and 

when  must  it  take  place  in  order  to  avoid  the  policy? 
ID.  An  insurance  company  fails,  and  can  pay  but  6  per  cent  of  its 
liabilities.  Some  of  its  risks  are  reinsured.  Is  the  solvent 
reinsurer  liable  for  the  whole  amount  insured  by  it,  or  only 
for  the  amount  which  the  bankrupt  insurer  pays?  Answer 
fully  and  give  reasons. 


CHAPTER  XXXVIII 

LIFE  INSURANCE 

§  235.     Nature  of  Contract 

Life  insurance  today  is  one  of  the  most  important  busi- 
nesses in  the  country.  Before  the  invention  of  the  mortality 
tables  the  rates  were  high  and  the  business  was  on  too  uncer- 
tain a  basis  to  be  widely  utilized.  With  its  present  develop- 
ment it  has  become  of  the  greatest  value  as  a  means  of  saving, 
investing,  and  protecting  business.  Its  value  as  a  protection 
against  a  dependent  old  age  has  caused  governments  through- 
out the  world  to  become  interested  in  it,  different  forms  of  old- 
age  insurance  being  in  use  in  various  countries  and  among  the 
state  employees  of  Massachusetts. 

This  form  of  insurance  has  been  under  discussion  for  the 
past  few  years  by  the  various  state  legislatures  and  commis- 
sions appointed  for  that  purpose,  but  aside  from  Massachusetts 
has  not  actually  come  into  being.  The  main  objection,  of 
course,  to  such  insurance  is  that  it  will  raise  the  taxes,  and 
legislatures  do  not  feel  that  the  need  is  great  enough  to  justify 
the  increase  of  taxes  at  the  present  time. 

§  236.     Insurable  Interest 

Like  the  contract  of  fire  insurance,  the  contract  of  life  in- 
surance is  a  speculative  one.  If  a  person  attempts  to  insure  the 
life  of  someone  other  than  himself,  he  must  have  an  insurable 
interest  in  it,  though  this  interest  need  not  continue  during  the 
life  of  the  insured  nor  exist  at  his  death.  One  may,  however, 
insure  one's  own  life  and  make  such  insurance  payable  to  a 
beneficiary  who  has  no  insurable  interest  in  one's  life. 

280 


LIFE  INSURANCE  281 

An  insurable  interest  in  a  human  life  is  not  easy  to  define. 
Generally  the  party  who  does  the  insuring  must  be  related  to 
the  insured  by  such  ties  of  blood,  marriage,  or  contract  that  the 
death  of  the  insured  would  materially  injure  him.  A  married 
couple  have  an  insurable  interest  in  each  other's  lives ;  a  father 
has  an  insurable  interest  in  the  lives  of  his  children  because 
they  might  some  day  support  him;  a  sister  may  insure  her 
brother  for  similar  reasons;  a  partner  may  insure  the  life  of 
his  copartner;  or  a  creditor  may  likewise  insure  the  life  of  a 
debtor. 

§  237.    The  Parties 

The  parties  to  a  life  Insurance  policy  are:  the  person  whose 
life  is  insured,  or  the  applicant;  the  person  for  whose  benefit 
it  is  insured,  or  the  beneficiary;  and  the  person  or  company 
insuring  it. 

Life  insurance  may  be  conducted  either  through  a  corpora- 
tion, or  through  a  fraternal  organization,  or  it  may  be  mutual. 
Many  of  the  large  life  insurance  companies  are  either  mutual- 
ized,  or  are  mutualizing.  In  a  mutualized  life  insurance  com- 
pany, all  excess  over  actual  cost  of  insuring  is  later  returned 
to  the  policyholders  as  dividends.  In  a  stock  corporation,  this 
excess  goes  to  the  stockholders.  Where  a  former  stock  com- 
pany becomes  mutualized,  provisions  are  usually  made  by 
which  the  stockholders  and  policyholders  are  each  to  have  a 
share  in  the  dividends  in  proportion  to  what  is  determined  to 
be  their  actual  interest  in  the  company. 

Fraternal  benefit  Insurance  exists  among  the  various 
masonic  and  other  orders  and  in  many  business  organizations. 
It  is  a  form  of  mutual  life  insurance.  When  a  benefit  falls 
due,  it  is  raised  by  assessment  on  the  members  In  proportion 
to  their  rights  to  benefit  by  the  fund,  or  else  a  fund  is  raised 
by  assessment  and  kept  on  hand  to  meet  the  benefits  as  they 
become  due. 


282  INSURANCE 


§  238.     The  Policy 


Policies  are  of  various  forms.  In  participation  policies, 
the  accumulated  surplus  in  any  year  is  divided  among  the 
policies  and  the  share  of  each  is  credited  to  it,  to  be  paid  over 
when  the  policy  becomes  due. 

In  non-forfeitable  or  incontestable  policies,  the  company 
agrees  that  after  a  certain  period  of  time  the  policy  shall  not 
be  forfeited  for  any  cause  except  non-payment  of  premiums. 
Courts  will  usually  enforce  this  agreement.  Of  course,  if  the 
beneficiary  has  no  insurable  interest,  the  contract  would  have 
been  illegal  from  the  first  and  could  not  be  enforced. 

Policies  may  be  whole  life,  that  is,  the  premiums  continue 
to  be  payable  until  the  death  of  the  person  whose  life  is  in- 
sured. If  the  policy  is  a  participating  one,  the  dividends  may 
either  be  applied  to  reduction  of  the  premiums,  or  may  be 
accumulated,  as  the  holder  prefers. 

Another  form  of  policy  is  limited  payment  life.  The 
premiums  on  this  class  of  policy  are  so  divided  as  to  be  payable 
within  a  limited  number  of  years.  After  this  the  policy 
becomes  a  paid-up  policy  and  is  payable  on  the  death  of  the 
person  whose  life  was  insured. 

There  are  also  endowment  policies  and  term  policies.  The 
endowment  policy  is  perhaps  the  most  common  form  of  policy. 
Under  it,  the  amount  is  payable  either  at  the  end  of  a  fixed 
term  of  years,  or  upon  death  in  case  of  death  before  the 
expiration  of  that  period.  This  policy  operates  both  as  an 
investment  and  a  protection.  At  the  end  of  the  term  the 
insured  may,  as  a  general  rule,  exercise  his  option  to  take  out 
a  paid-up  policy  and  leave  the  money  invested. 

Term  insurance  is  unlike  endowment  insurance  in  that  it 
does  not  allow  any  accumulations,  nor  permit  the  holder  to 
take  out  a  paid-up  policy  at  the  end  of  the  term.  When  the 
term  has  expired  it  simply  lapses. 


LIFE  INSURANCE  283 

Term  insurance  is  simply  protection  for  a  definite  term 
at  the  lowest  possible  cost.  Like  fire  insurance  it  covers 
the  risk  for  the  time  specified  and  then  ceases.  It  provides 
no  accumulations  to  offset  advancing  age,  the  insured  must 
assume  this  burden,  nor  does  it  provide  cash,  loan,  extended 
insurance  or  paid-up  values.^ 

Double  indemnity  policies  were  first  offered  about  191 2. 
These  policies  provide  that  in  case  of  death  by  accident,  the 
beneficiary  shall  receive  twice  the  face  of  the  policy.  At  first 
this  double  payment  was  made  only  in  case  of  death  by 
accident  on  a  common  carrier,  but  the  policies  now  being 
written  provide  for  double  indemnity  in  case  of  death  by 
any  accident.  In  addition,  these  policies  now  provide  that  in 
case  of  permanent  disability,  payment  of  premiums  shall  be 
waived  and  one-tenth  the  face  of  the  policy  will  be  paid  each 
year,  and  at  death  the  full  face  of  the  policy  will  be  paid. 

Application  and  Examination.  If  the  company  does  not 
consider  the  life  a  good  risk,  it  has  a  right  to  reject  the  appli- 
cation. The  applicant  is  required  to  answer  questions  on  an 
application  blank  and  to  submit  to  a  medical  examination.  As 
the  application  blank  is  made  a  part  of  the  policy,  any  state- 
ments on  it  amount  to  warranties,  and  the  policy  will  be  of  no 
value  if  any  of  them  are  false.  If,  otherwise  than  on  the  blank, 
the  insured  makes  any  false  representations  which  have  any 
effect  on  the  risk  or  the  insurance,  the  policy  is  void. 

Notes: 

1.  A  policy  of  life  insurance  should  always  be  carefully 

read  to  make  sure  that  the  kind  asked  for  has  been 
Issued.  It  is  well  to  examine  closely  various 
forms  and  find  out  the  advantages  they  offer  be- 
fore insuring.  The  laws  of  some  states  give  more 
security  to  the  insured  than  the  laws  of  others. 

2.  Fraternal  insurance  has  failed  in  many  cases,  be- 


>  Dunham  on   Insurance,  I,  298. 


284  INSURANCE 

cause  new  members  ceased  joining  and  those  re- 
maining could  not  pay  the  increased  assessment. 
3.  To  cheat  the  company  by  answering  questions  on  an 
appHcation  blank  falsely  is  useless.  The  policy 
will  be  worthless  when  the  insurance  is  needed. 

§  239.    Premium  Rates 

The  premium  rates  in  life  insurance  are  worked  out  by 
means  of  the  mortality  tables.  These  are  tables  based  on  an 
examination  of  statistics,  giving  the  probable  length  of  life  at 
certain  ages.  Accordingly  a  young  person  can  take  out  in- 
surance at  a  smaller  premium  rate  than  a  middle-aged  person. 
The  rate  increases  as  one  grows  older  and  death  becomes  more 
imminent. 

If  these  premiums  are  not  paid  when  they  are  due  the 
policy  becomes  forfeited;  but  the  company  must  give  notice 
to  the  person  whose  life  is  insured,  or  to  the  assignee  if  the 
policy  has  been  assigned,  and  notice  to  him  again  each  time  a 
premium  becomes  due.  The  company  may  extend  the  time  of 
payment  or  take  a  note  for  the  amount. 

In  fraternal  insurance  the  members  of  the  association  are 
usually  not  charged  premiums  but  are  assessed  on  the  basis  of 
their  interest  in  the  common  fund.  Sometimes  these  assess- 
ments are  made  from  time  to  time  and  a  fund  accumulated; 
more  frequently  they  are  made  when  some  member  dies  and 
his  family  becomes  entitled  to  the  benefit. 

Note: 

I.     It  Is  much  cheaper  to  take  out  Insurance  early  In  life. 

§  240.    Agents 

Life  insurance  agents,  as  well  as  fire  Insurance  agents,  must 
procure  a  license  from  the  state  department  in  charge  of  in- 


LIFE  INSURANCE  285 

surance.    In  New  York  these  licenses  have  to  be  renewed  every 
year.    (See  Part  IV  on  the  general  subject  of  agency.) 

§  241.     Right  to  Change  Beneficiary 

Unless  there  is  a  clause  in  the  policy  reserving  the  right  to 
change  the  beneficiary,  no  change  can  be  made  without  his 
consent  in  writing.  The  beneficiary  has  a  vested  right  in  the 
policy — one  which  he  can  himself  transfer  to  someone  else. 
In  some  states,  even  if  he  dies  before  the  insured,  the  profits 
of  the  policy  will  go  to  the  beneficiary's  estate  and  no  one  else 
can  be  named. 

The  beneficiary  cannot  be  changed  without  his  consent  if 
the  insured  has  taken  out  the  policy  under  an  agreement  with 
him,  or  if  the  beneficiary  has  paid  any  of  the  premiums. 

The  consent  of  the  company  must  always  be  obtained  to 
any  change  of  beneficiary.    This  consent  must  be  in  writing. 

Note: 

I.     The  policy  should  always  contain  a  clause  permitting 
a  change  in  the  beneficiary.     If  such  a  change  is 
not  provided  for,  anyone  taking  the  policy  as  se- 
.    curity  must  get  the  written  consent  of  the  bene- 
ficiary to  the  arrangement. 

§  242.    Assignment  of  Policy 

A  policy  of  life  insurance  belongs  to  the  insured  if  he 
has  taken  it  out  and  by  its  terms  has  the  right  to  change  the 
beneficiary,  or  to  make  his  own  estate  the  beneficiary. 
The  beneficiary  in  such  case  has  only  a  contingent  in- 
terest, and  has  nothing  he  can  assign  to  anyone  else.  If, 
however,  under  the  terms  of  the  policy  the  insured  cannot 
change  the  beneficiary,  then  the  beneficiary  has  a  vested  in- 
terest and  he  alone  can  assign  it.  The  company  must  be  notified 
of  any  assignment. 


286  INSURANCE 

§  243.     Settlement  of  Losses 

When  he  makes  his  claim  for  the  proceeds  of  the  policy, 
the  beneficiary  must  send  with  it  a  proof  of  death  filled  out  on 
one  of  the  company's  forms  and  certified  by  a  physician. 

Where  there  has  been  a  change  of  beneficiaries  or  the 
policy  has  been  used  as  security,  there  may  be  conflicting  claims 
for  the  proceeds.  If  the  various  claimants  can  agree  among 
themselves,  the  company  will  generally  pay  the  loss  to  those 
who  are  admitted  to  be  entitled  to  it,  upon  receiving  releases 
from  all  the  claimants.  If  there  is  a  dispute  which  cannot  be 
settled  otherwise,  it  usually  has  to  be  decided  in  court. 

The  company  will  resist  the  payment  of  claims  if  there  was 
any  fraud  in  the  procuring  of  the  policy  or  if  misrepresenta- 
tions as  to  the  health  of  the  insured  come  to  its  knowledge.  In 
one  case  known  to  the  writer,  the  beneficiary  in  the  proof  of 
death  made  a  statement  as  to  the  age  of  the  insured  person 
which  differed  from  that  made  in  the  policy.  The  company 
discovered  that  there  had  been  a  misrepresentation  and  re- 
sisted the  payment  of  the  claim. 

Suicide,  unless  committed  within  a  year  from  the  time  the 
policy  was  taken  out,  does  not  generally  excuse  the  company 
from  payment.  Many  policies  provide  that  if  the  insured  is 
killed  while  engaged  in  the  commission  of  crime  or  executed 
as  a  punishment  for  crime,  the  policy  will  not  be  payable.  The 
death  must  be  the  result  of  the  crime  in  order  to  render  the 
policy  void.  Dying  of  apoplexy  while  attempting  to  hold  up 
a  train  would  not  excuse  payment. 

Notes: 

I.  In  order  to  make  sure  that  the  proceeds  of  a  policy 
will  go  to  the  person  whom  the  insured  intends  to 
benefit,  without  an  expensive  lawsuit,  it  is  wisest, 
when  making  any  change  in  a  policy,  to  get  a 
written  release  from  any  party  who  may  be  af- 


LIFE  INSURANCE  287 

fected  by  the  change,  and  keep  it  attached  to  the 
policy. 
2.     Under  the  New  York  law,  creditors  can  collect  all 
insurance  over  the  amount  a  $500  a  year  premium 
will  bring. 

§  244.     Government  Insurance  for  Soldiers  and  Sailors 

At  the  entrance  of  the  United  States  into  the  Great  War, 
the  government  announced,  as  a  substitute  for  the  pension 
system,  a  plan  of  insurance  for  oflficers  and  men  of  the  army, 
navy  and  marine  corps.  Under  this  plan,  the  government 
undertook  the  costs  of  administration,  and  offered  term  in- 
surance on  the  monthly  income  plan.     (See  §  238.) 

The  term  extended  from  the  beginning  of  the  war  to  five 
years  after  the  declaration  of  peace.  By  the  monthly  income 
plan  is  meant  a  system  of  paying  the  beneficiary,  not  a  lump 
sum  to  be  kept  as  capital,  but  a  monthly  sum  to  be  used  as 
income,  payment  to  run  in  this  case,  for  a  period  of  twenty 
years.  By  this  system  a  man  taking  out  the  maximum  insurance 
of  $10,000  would  pay  approximately  $6.50  per  month  for  it, 
the  rate  increasing  slightly  each  year.  In  case  of  his  death 
from  any  cause  his  beneficiary  (who  must  be  a  relative)  re- 
ceives $57.50  each  month  until  240  payments  have  been  made). 

Within  about  six  months  after  the  armistice  was  signed, 
the  government  announced  a  plan  of  converting  any  of  these 
term  policies  into  one  of  six  forms  more  closely  resembling 
ordinary  comi.iercial  insurance.  The  new  forms  offered  pro- 
tection to  ex-soldiers,  sailors  and  marines  for  the  remainder 
of  their  lives.  Conversion  may  be  made  at  any  time  within 
five  years  after  peace  has  been  declared;  if  not  made  at  all, 
the  insurance  simply  stops. 

The  six  policies  now  offered  holders  of  the  original  term 
insurance  are: 


288  INSURANCE 

1.  Ordinary  life 

2.  Twenty-payment  life 

3.  Thirty-payment  life 

4.  Twenty-year  endowment 

5.  Thirty-year  endowment 

6.  Endowment  at  age  of  sixty-two 

In  all  cases  except  where  the  policyholder  lives  to  draw 
the  endowment  himself,  the  benefit  is  paid  on  the  monthly 
income  plan,  payments  covering  twenty  years.  A  disability 
clause  is  attached  to  all  these  policies,  whereby  if  the  policy- 
holder is  totally  and  permanently  disabled,  the  government 
waives  premiums  and  pays  him  for  the  remainder  of  his  life, 
the  monthly  income  his  beneficiary  would  have  had.  This 
deprives  the  beneficiary  of  any  payments  except  where  the 
insured  dies  before  240  payments  are  made  to  him.  In  such 
a  case,  the  beneficiary  receives  a  monthly  income  for  the  re- 
mainder of  the  twenty  years. 

All  matters  relating  to  this  subject  are  controlled  by  the 
Bureau  of  War  Risk  Insurance,  Washington,  D.  C.  In  case 
the  Bureau  gives  an  adverse  decision  on  any  claim,  appeal  may 
be  taken  to  the  federal  courts. 


Review  Questions 

1.  What  is  meant  by  an  insurable  interest  in  another  person's  life? 

2.  What  are  the  three  methods  of  life  insurance?    Explain  each. 

3.  Explain   the   following   classes   of   policies:    Participation,   non- 

forfeitable, whole  life,  limited  payment  life,  endowment,  and 
term. 

4.  One  Williams  had  a  life  insurance  policy  in  the  American  Life 

Insurance  Company  for  $10,000.  The  policy  provided  that  if 
the  annual  premium  was  not  paid  on  the  day  it  became  due 
the  policy  should  become  void.  Williams  became  ill  and  failed 
to  pay  the  premium  on  the  day  it  was  due,  and  about  a  week 


LIFE  INSURANCE  280 

afterwards  his  son  wrote  the  office  of  the  company  in  care 
of  the  president,  and  told  him  that  his  father  was  ill,  and 
asked  that  the  time  be  extended.  The  president  wrote  back 
that  if  he  would  pay  the  premiums  within  one  week  it  would 
be  all  right.  Williams  died  the  following  day,  and  before  the 
week  elapsed,  the  son  came  and  tendered  the  premium,  which 
the  company  declined  to  receive,  and  denied  any  liability  on 
the  policy.  Is  the  company  liable  thereon?  Give  your  reasons 
for  your  answer? 

5.  Can  the  beneficiary  be  changed? 

6.  When  can  the  beneficiary  assign  his  rights? 

7.  Why   did   the    government   arrange   to    insure    its   soldiers    and 

sailors  ? 

8.  Into  what  forms  was  this  converted  at  the  close  of  the  war? 


CHAPTER  XXXIX 

SUNDRY  INSURANCE  CONTRACTS 

§  245.     Enumeration 

In  addition  to  fire  and  life  insurance,  there  are  sundry 
other  insurance  contracts,  such  as  marine,  accident,  health, 
group,  liability,  title,  burglary,  plate  glass,  automobile,  boiler, 
burial,  credit,  fidelity,  hail,  live  stock,  rent,  strike,  and  tornado. 

In  all  of  these  the  policies  call  for  certain  representations 
which  must  be  truthful ;  and  proofs  of  loss  must  be  made  out 
and,  as  a  rule,  sworn  to,  when  payment  of  a  loss  is  claimed. 

§  246.     Marine  Insurance 

This  is  the  oldest  form  of  insurance,  older  than  either  fire 
or  life  insurance.  It  originated  in  Lloyd's  Coffee  House  in 
London,  and  the  policy  is  known  as  Lloyd's.  The  policies  were 
passed  around  among  the  dealers  in  insurance,  and  each  took 
such  share  of  any  given  risk  as  he  cared  to.  These  subscribers 
were  called  underwriters  and  in  case  of  loss  they  were  assessed 
in  proportion  to  their  subscriptions  to  pay  the  loss.  The  busi- 
ness is  handled  by  regular  incorporated  companies  today.  Its 
object  is  to  protect  the  insured  against  losses  on  a  vessel  at 
sea.  Marine  policies  may  also  be  taken  out  on  ships  traveling 
in  any  navigable  waters. 

The  policy  covers  losses  by  fire,  various  forms  of  ship- 
wreck including  losses  incurred  in  trying  to  avert  shipwreck, 
and  losses  from  piracy.  The  insured  is  by  custom  held  to  be 
in  duty  bound  to  give  the  insurer  all  information  in  his  power 
with  regard  to  the  ship,  the  voyage,  the  cargo,  or  anything 
else  that  might  affect  the  risk.     If  he  conceals  anything  or 

290 


SUNDRY  INSURANCE  CONTRACTS  291 

makes  any  false  representations,  the  policy  will  not  take 
effect.  The  person  taking  out  marine  insurance  must  fulfil 
the  following  requirements: 

1.  He  must  have  an  insurable  interest  in  the  goods  or 

vessel  insured. 

2.  He  must  warrant  that  the  vessel  is  seaworthy. 

3.  He  must  warrant  that  the  goods  insured  were  in  good 

condition  when  taken  on  board. 

If  any  of  these  conditions  are  not  met,  the  insurer  will  not  be 
liable. 

In  a  marine  policy,  the  amount  payable  in  case  of  loss  is 
fixed  by  the  policy,  and  no  attempt  at  valuation  is  made  unless 
the  loss  is  incomplete.  Marine  policies  also  cover  what  is 
known  as  general  average. 

Proofs  of  loss,  giving  full  particulars  of  the  nature, 
amount,  and  cause  of  the  damage  must  be  made  out  and  sworn 
to  by  the  master  and  crew  of  the  vessel ;  and  then  an  investiga- 
tion is  made  either  by  some  government  surveyor  of  the  port, 
or  by  experts  chosen  by  the  parties  to  the  contract.  In  the 
event  of  a  dispute  as  to  the  amount  of  the  damage,  the 
damaged  goods  are  sold  at  auction  and  the  amount  determined 
in  that  way.  The  insured  must  show  bills  of  lading  or  other 
documents  to  prove  his  ownership  of  damaged  goods,  and  the 
policy  cannot  be  assigned  without  the  underwriter's  consent. 

In  the  American  Lloyd's  policies  it  is  provided  that  if  there 
is  any  prior  insurance  on  the  vessel  the  underwriters  shall  be 
liable  only  to  the  extent  that  the  prior  policies  do  not  cover 
the  loss. 

§  247.     General  and  Particular  Average 

From  the  earliest  times,  it  has  been  the  custom,  where 
goods  were  jettisoned  (i.e.,  thrown  overboard  at  sea  to  save 
the  vessel),  for  the  other  owners  of  merchandise  on  board  and 


292  INSURANCE 

the  owners  of  the  vessel  to  contribute  proportionately  to  make 
good  the  loss.  This  is  called  "general  average."  In  calculating 
the  assessment  the  owner  of  the  lost  goods  is  included;  it 
follows  that  he  is  never  reimbursed  by  general  average  for  his 
full  loss.  The  assessment  is  a  lien  against  the  goods  until  the 
entire  amount  is  paid.  The  underwriter  takes  upon  himself 
the  responsibility  of  collecting  this  contribution. 

The  term  "particular  average"  is  applied  to  the  payment  for 
partial  loss.  This  refers  to  actual  insurance  on  the  particular 
thing  or  goods  insured  and  is  paid  by  an  insurance  company. 
The  clause  reads  generally  to  this  effect:  "no  partial  loss  or 
particular  average  shall  in  any  case  be  paid,  unless  amounting 
to  5  per  cent."  Then  if  less  than  5  per  cent  of  the  goods  is 
completely  lost,  no  claim  at  all  can  be  made  against  the  in- 
surance company;  or  if  the  whole  cargo  is  damaged  to  a  slight 
extent,  no  claim  can  be  made.  The  term  to  indicate  that  a 
policy  does  not  cover  partial  losses,  is  "free  of  particular 
average,"  often  abbreviated  to  F.  P.  A.  The  opposite  term, 
indicating  more  complete  insurance  at  a  higher  rate,  is  "with 
average"  (W.  A.)  or  "against  all  risks"  (A.  A.  R.) 

Note: 

I.  Anyone  taking  out  a  marine  policy  should  be  care- 
ful to  note  just. what  dangers  it  protects  against, 
especially  what  provision  it  makes  in  case  of  war. 
In  the  Lloyd's  policy  it  is  necessary  to  make  a 
special  arrangement,  as  the  ordinary  policy  ex- 
pressly releases  the  insurer  from  damages  arising 
from  the  perils  of  war. 

§  248.     Accident  Insurance 

Accident  insurance  is  insurance  against  injury  or  death  by 
accident.  The  policy  may  cover  injury  only,  or  it  may  also 
provide  for  a  payment  to  a  beneficiary  in  case  of  the  death  of 


SUNDRY  INSURANCE  CONTRACTS  293 

the  insured  by  any  accident.  The  proceeds  are  payable  to  the 
person  himself  in  case  of  injury.  These  policies  do  not  cover 
mere  illness,  but  such  things  as  ivy  poisoning,  etc.,  which  are 
regarded  as  accidents,  are  included. 

Sometimes  there  is  a  dispute  as  to  what  constitutes  an  acci- 
dental injury.  Thus,  although  infected  water  might  be  drunk 
through  accident  and  serious  illness  result,  one  could  not  col- 
lect an  indemnity;  whereas  one  could  collect  on  injuries  due 
to  inhaling  gas,  poison  taken  by  mistake,  etc. 

Many  companies  will  not  pay  if  the  insured  exposed  him- 
self to  unnecessary  risk  such  as  jumping  on  a  moving  street- 
car; nor  will  they  pay  for  injuries  received  while  intoxicated, 
though  in  this  regard  there  is  sometimes  great  difficulty  in 
deciding  if  a  person's  intoxication  were  such  as  to  make  him 
more  liable  to  injury,  and  if  it  were  not  they  would  have  to 
pay. 

All  accident  policies  provide  lump-sum  indemnities  for 
such  injuries  as  the  loss  of  a  hand,  etc. 

§  249.    Health  Insurance 

Some  companies  insure  against  sickness  and  ill  health. 
Usually  these  policies  name  a  list  of  diseases  in  event  of  which 
a  weekly  indemnity  is  granted.  In  some  cases  the  health 
insurance  is  allowed  only  in  conjunction  with  accident  insur- 
ance. Some  of  the  fraternal  orders  allow  their  members  sick 
benefits  which  are  the  equivalent  of  health  insurance.  Practi- 
cal difficulties  in  administering  the  business  of  Insuring  against 
sickness  have  limited  its  development.  A  savings  account  is 
probably  the  best  provision  against  ill  health. 

§  250.     Group  Insurance 

Group  insurance  is  a  plan  to  insure  a  number  of  the  em- 
ployees of  one  employer  offering  an  eligible  group,  without 
individual  medical  examination,  under  one  blanket  contract 


294  INSURANCE 

issued  to  the  employer.  It  is  generally  applied  only  to  life 
insurance  though  the  principle  of  insuring  a  group  could 
logically  be  applied  to  accident  and  health  insurance  at  least. 

The  premiums  for  this  insurance  are  paid  monthly  by  the 
employer  and  the  insurance  is  payable  to  the  beneficiary  named 
by  the  employee.  Ordinarily  the  basis  of  insurance  is  one 
year's  salary  with  a  maximum  of  $3,000  to  any  individual. 
Any  employee  receiving  annual  remuneration  in  excess  of  that 
sum  would  receive  only  $3,000  insurance. 

If  it  is  desired  by  the  employer,  the  insurance  company  will 
settle  the  insurance  benefits  in  twelve  monthly  payments.  This 
would  amount  to  a  continuance  of  the  pay  check  for  a  full 
year  in  the  event  of  death  while  in  service — during  which  time 
the  beneficiaries  would  be  able  to  adjust  themselves  to  the 
changed  conditions  caused  by  the  death  of  the  breadwinner. 

The  operation  of  the  plan  is  simple.  New  incoming  em- 
employees  are  automatically  included  upon  passing  a  simple 
health  test  and  the  insurance  by  the  employer  on  outgoing 
employees  ceases  upon  termination  of  service. 

The  cost  depends  on  the  age  and  annual  wage  of  each 
employee.  It  would  be  approximately  i  ^  per  cent  to  1 5^  per 
cent  of  the  annual  pay-roll. 

§  251.     Liability  Insurance 

Liability  insurance  is  to  protect  the  employer  from  liabili- 
ties arising  under  the  Employers'  Liability  or  Workmen's  Com- 
pensation Acts.  (See  §§  279,  280.)  In  many  states  it  is 
possible  to  take  out  this  form  of  insurance  with  a  state' fund. 
There  is  also  automobile  liability  insurance,  which  covers  lia- 
bility for  injuries  to  others  resulting  from  the  use  of  the  auto- 
mobile. Railroad  companies  may  take  out  insurance  (carriers' 
liability  insurance)  to  protect  them  against  liability  to  pas- 
sengers and  others,  for  injuries  arising  from  railroad  acci- 
dents. 


SUNDRY  INSURANCE  CONTRACTS  295 

§  252.    Title  Insurance 

In  order  to  protect  purchasers  of  real  estate  against  tlie 
expense  of  lawsuits  arising  from  possible  defects  in  the  title 
to  the  property,  a  business  of  investigating  and  insuring  the 
title  has  grown  up.  Title  insurance  companies  generally  fur- 
nish both  title  searches  and  insurance.  As  with  most  other 
insurance  of  this  nature,  the  company  generally  settles  the 
claim  or  defends  the  suit  on  notice  from  the  insured  that  he 
has  been  served  with  a  notice  of  suit. 

§  253.    Burglary  Insurance 

This  is  one  form  of  what  is  known  as  casualty  insurance, 
that  is,  insurance  against  accidents  to  property  of  various  kinds 
other  than  loss  by  fire.  It  is,  as  the  name  implies,  insurance 
against  loss  of  property  by  theft.  It  applies  only  when  the 
theft  is  committed  by  someone  breaking  into  the  house  or 
building  where  the  property  is  kept,  unless  the  policy  states 
otherwise.    It  would  not  cover  having  one's  pocket  picked. 

§  254.    Plate  Glass  Insurance 

This  is  insurance  on  large  plate  glass  windows  because  of 
the  great  expense  of  replacing  them.  It  also  is  a  form  of 
casualty  insurance.  Where  the  windows  are  injured  in  a  fire, 
if  there  is  any  insurance  other  than  the  glass  insurance  policy 
on  them  or  on  the  building,  only  an  amount  proportioned  to 
the  relation  of  that  policy  to  the  whole  amount  of  insurance 
on  the  building  can  be  collected  on  the  plate  glass  insurance 
policy. 

§  255.     Automobile  Insurance 

Many  companies  offer  automobile  insurance.  What  is 
known  as  a  full  cover  on  an  automobile  includes  insurance 
against  the  hazards  of: 


296  INSURANCE 

1.  Fire  or  explosion. 

2.  Transportation,  i.e.,  derailment  and  collision. 

3.  Theft. 

4.  Damage  by  fire  to  personal  effects  carried  upon  the 

car. 

5.  Damage  to  other  property  by  being  in  collision  with 

the  automobile  insured — known  as  property  dam- 
age. 

6.  Damage  to  the  automobile  insured  by  being  in  col- 

lision with  some  other  object. 

7.  Loss  of  life  or  injury  to  the  occupants  of  the  car  and 

legal  liability  for  expenses  in  connection  therewith. 

8.  Loss  of  life  or  injury  to  others  and  legal  liability  for 

expenses  in  connection  therewith. 

The  rates  are  high  to  compensate  for  the  very  considerable 
risks.  What  is  known  as  the  "moral  hazard,"  i.e.,  the  risk  of 
unfair  dealing  by  owners,  is  great,  and  hard  to  guard  against. 
The  enumeration  of  hazards  shows  the  varied  possibilities  of 
loss  and  damage. 

§  256.  Other  Forms  of  Insurance 

Boiler  Insurance.  This  is  insurance  against  injuries  to 
property  arising  from  boiler  explosions,  another  form  of 
casualty  insurance.  A  fire  insurance  policy  does  not  cover 
such  a  loss  unless  the  explosion  resulted  from  a  fire. 

Burial  Insurance.  This  form  of  insurance  is  in  operation 
among  the  very  poor.  In  return  for  certain  weekly  or  monthly 
payments,  the  company  guarantees  to  pay  the  expenses  of  a 
decent  burial. 

Credit  Insurance.  Credit  insurance  is  insurance  against 
the  dishonesty  or  the  insolvency  of  debtors. 

Fidelity  Insurance.  Fidelity  insurance  is  insurance  against 
losses  arising  from  fraud  or  dishonesty  on  the  part  of  agents 
or  employees.    There  are  three  forms  of  fidelity  bonds:  first. 


SUNDRY  INSURANCE  CONTRACTS  297 

the  larceny  or  embezzlement  bond;  second,  the  culpable  neg- 
ligence bond ;  and  third,  the  faithful  performance  bond.  The 
last  is  the  most  comprehensive  and  the  most  costly. 

Hail  Insurance.  This  is  common  in  the  grain  states,  where 
the  farmers  often  suffer  heavy  loss  because  of  the  damage  hail- 
storms do  their  crops. 

Live  Stock  Insurance.  Blooded  animals  are  so  valuable  that 
their  owners  find  it  necessary  to  protect  themselves  against 
loss  by  carrying  insurance  against  disease  or  death. 

Rent  Insurance.  This  is  insurance  for  the  loss  of  rents 
owing  to  the  failure  of  tenants  to  pay  rent,  or  to  a  destruction 
of  the  property  by  fire  or  some  other  calamity. 

Strike  Insurance.  An  employer  can  even  insure  himself 
against  strikes  on  the  part  of  his  employees,  and  the  consequent 
losses. 

Tornado  Insurance.  As  its  name  indicates,  this  is  insur- 
ance against  damages  and  loss  of  property  arising  from  tor- 
nadoes. 


Review  Questions 

1.  What  three  requirements  are  essential  to  the  contract  of  marine 

insurance  ? 

2.  Has  a  stockholder  an  insurable  interest  in  a  steamboat  owned 

but  not  insured  by  the  corporation? 

3.  What  is  "general  average"? 

4.  What  is  "particular  average"? 

5.  What  risks  are  usually  covered  by  an  accident  insurance  policy  ? 

6.  What  is  group  insurance? 

7.  What  is  the  usual  purpose  of  liability  insurance?     Who  takes 

out  the  policy? 

8.  What  is  title  insurance? 

9.  What  does  the  owner  of  an  automobile  want  insurance  against? 
ID.     Who  takes  out  fidelity  insurance?     What  is  the  simplest  form? 

Under  this  form  could  the  holder  of  the  policy  recover  if  his 
employee  lost  the  money  ? 


PART  VII 
EMPLOYMENT 


CHAPTER  XL 

THE  CONTRACT  OF  EMPLOYMENT^ 

§  257.     Introduction 

The  contract  of  employment  is  perhaps  the  one  which  most 
concerns  the  ordinary  man  in  his  every-day  affairs.  All  the 
relations  between  employers  and  employees  are  governed  by 
contract  and  the  laws  regulating  the  subject.  In  recent  years, 
these  laws  have  undergone  almost  a  revolution;  and  they  are 
still  being  rapidly  changed  to  meet  the  modern  ideas  of  what 
such  relationships  should  be,  and  the  new  sense  of  the  obliga- 
tions which  the  employer  owes  to  those  under  him.  It  is  most 
important  for  everyone  to  know  exactly  what  these  changes 
in  the  law  are,  and  how  they  may  affect  him  individually. 

The  Federal  Employers'  Liability  Act,  which  defines  the 
rights  of  all  employees  engaged  in  the  business  of  interstate 
commerce,  has  been  followed  in  many  of  the  states  by  acts 
of  like  tenor ;  and  various  efforts  have  been  made  to  introduce 
some  of  the  schemes  for  workmen's  compensation  and  old-age 
pensions  from  abroad.  Both  of  these  plans  have  already  been 
adopted  in  some  of  the  states ;  and,  it  would  appear  from  the 
trend  of  modern  legislation,  they  are  likely  in  the  near  future 
to  be  enacted  into  some  form  of  law  in  most  states  of  the 
Union. 

Too  much  importance  cannot  therefore  be  given  to  the  con- 
tents of  this  particular  chapter.  For  this  reason  the  subject  of 
the  relations  of  employer  and  employee  has  been  treated  with 
some  fulness  of  detail. 


*  For  forms  of  contract  of  employment,  see  Chapter  CIV,   Forms  46,  49. 


302  EMPLOYMENT 

§  258.     Definition 

A  contract  of  employment  is  a  contract  for  the  performance 
of  services,  by  the  terms  of  which  the  employer  is  to  direct  how 
the  work  is  to  be  done  and  what  results  are  to  be  accomplished. 
This  personal  direction  by  the  employer  is  the  essential  fea- 
ture. A  contract  with  a  tailor  for  a  suit  of  clothes  is  not  a 
contract  of  employment  because  it  lacks  the  element  of  per- 
sonal supervision. 

In  the  older  law  books  the  subject  of  this  part  of  the  book 
was  treated  under  the  head  of  "Master  and  Servant."  It  is 
far  from  modern  habits  of  thought  and  speech  to  consider 
a  member  of  a  labor  union  or  the  auditor  of  a  corporation  as 
a  servant.  Hence,  the  obsolete  terms  are  not  used  in  this 
work. 

§  259.    What  Constitutes  a  Contract  of  Employment 

There  must  be  an  agreement  by  competent  parties.  One 
party  agrees  to  perform  services  for  the  other.  There  must 
be  a  consideration.  One  party  gives  his  services  in  return  for 
the  payment  of  wages  or  salary  by  the  other  party.  The  con- 
tract may  be  expressed  or  implied.  If  a  man  does  any  work 
for  another  on  request,  the  law  will  usually  imply  a  contract 
to  pay  a  reasonable  compensation.  If  services  are  rendered 
for  another  with  his  knowledge  and  acquiescence,  a  contract 
is  usually  implied. 

A  contract  to  do  work  on  shares  is  an  agreement  by  one 
party  to  perform  some  labor,  such  as  raising  a  crop,  for  a 
share  in  the  crop.  For  instance,  a  man  may  agree  to  cut  grass 
for  a  land  owner  for  half  the  grass.  Such  contracts  are  com- 
mon in  farming  communities.  The  fact  that  the  wages  are 
paid  otherwise  than  in  money  does  not  alter  the  relationship. 

As  has  been  stated  (§  258),  the  peculiar  and  distinguishing 
element  of  the  contract  of  employment  is  that  the  party  for 
whom  the  services  are  to  be  performed  has  the  right  to  direct 


THE  CONTRACT  OF  EMPLOYMENT        303 

the  other  party  in  what  he  is  to  do.  A  contract  to  build  a  house 
where  the  builder  merely  agrees  to  construct  a  house  according 
to  certain  plans  to  be  furnished  by  an  architect  and  to  the 
satisfaction  of  the  person  for  whom  he  is  building  it,  is  not  a 
contract  of  employment.  But  where  a  man  agrees  to  do  the 
manual  work  of  building  the  house  under  another's  orders  as 
to  how  it  shall  be  done,  he  is  that  other  man's  employee. 

The  essential  element  of  the  relation  of  employer  and 
employee  is  the  right  of  the  employer  to  give  orders  to  and 
direct  the  employee  in  the  performance  of  his  work. 

Most  of  the  work  on  public  buildings,  roads,  canals,  etc., 
is  done  by  letting  the  entire  contract  to  a  contractor  who  in 
turn  lets  out  parts  of  it  to  subcontractors.  The  question  of  the 
liability  of  the  main  contractor  to  the  employees  of  his  sub- 
contractors rests  on  this  principle.  If  the  employees  are  taking 
orders  from  his  foremen,  the  chief  contractor  is  liable  to  them 
as  he  would  be  to  his  own  employees  (see  §  271 ).  If  the  sub- 
contractors are  to  do  their  own  directing  and  give  the  orders 
to  their  own  men,  being  responsible  to  the  main  contractor 
only  for  the  finished  results  of  the  work,  then  he  is  not  liable 
to  their  workmen  any  more  than  he  would  be  to  outsiders. 

§  260.    Independent  Contractors 

Independent  contractors  are  not  employees.  An  inde- 
pendent contractor  is  a  man  who  engages  with  another  to  hand 
over  to  him  in  completed  form  some  particular  piece  of  work, 
and  to  receive  a  certain  sum  of  money  for  doing  it.  In  build- 
ing, the  excavating,  the  mason  work,  the  plumbing,  and  the 
painting  are  usually  undertaken  by  such  independent  con- 
tractors. 

Where  a  contractor  merely  engages  to  do  a  piece  of  work 
for  another  and  retains  the  right  to  direct  its  doing  himself 
through  his  own  foremen,  his  employees  do  not  ordinarily 
stand  in  the  relation  of  employees  to  the  person  with  whom  he 


304  *  EMPLOYMENT 

has  contracted.  Sometimes,  however,  the  law  says  they  shall 
have  the  rights  of  employees,  and  then  they  may  claim  them. 
Most  of  the  state  enactments  as  to  employers'  liability  and 
workmen's  compensation  give  employees  of  independent  con- 
tractors the  same  rights  against  the  principal  contractor  that 
his  own  workmen  have. 

§  261.     Interpretation  of  Contract 

The  contract  of  employment  is  to  be  interpreted  in  the 
light  of  what  both  parties  reasonably  understood  it  to  mean. 
The  same  rules  that  apply  to  contracts  in  general  govern  this 
type  of  contract.  (See  §  49.)  In  case  the  provisions  are 
indefinite,  the  question  as  to  when  it  will  be  understood  to 
begin  and  to  end  is  answered  in  §§  265,  266. 

Any  well-recognized  customs  in  the  particular  trade  or 
business  to  which  the  contract  under  consideration  relates, 
such  as  a  custom  of  paying  a  certain  percentage  as  commission 
to  insurance  agents,  etc.,  will  be  considered  in  seeking  to  find 
the  meaning  of  the  contract. 

§  262.    An  Express  Contract  Cannot  Be  Proved  by  Custom 

In  attempting  to  prove  an  express  contract  of  employment, 
it  is  not  enough  to  show  the  usual  custom  of  a  mercantile 
house  or  other  business  in  making  such  contracts.  The  house 
is  entitled  to  make  a  separate  contract  with  every  employee; 
the  duties  and  rights  of  each  employee  are  regulated  by  that 
contract  without  regard  to  dealings  with  other  employees. 

For  instance,  in  an  Alabama  case,  an  employee  claimed  that 
there  was  a  custom  in  the  firm  to  engage  employees  by  the 
year,  and  that  therefore  his  employment  with  them  was  for 
the  year.  The  court  said  that  he  must  prove  the  actual  agree- 
ment between  himself  and  the  firm.^ 


-  Hartsell  v.  Masterman,  132  Ala.  275;  31   So.  616. 


THE  CONTRACT  OF  EMPLOYMENT        305 

Sometimes  provisions  may  be  read  into  a  contract  from 
customs  which  are  universally  known  in  the  line  of  business  in 
which  the  contract  of  employment  was  made.  For  instance, 
if  there  was  a  universal  custom  to  pay  employees  by  the  week, 
the  court  might  find  from  the  testimony  that  both  parties  had 
it  in  mind  at  the  time  of  the  making  of  the  contract.  In  order 
to  prove  this  to  be  the  fact,  however,  the  custom  must  be  so 
universal  that  evervbody  in  the  business  ought  to  know  of  it, 
and  either  party  may  prove  that  they  expressly  agreed  other- 
wise. 

Note: 

I.  In  making  a  contract,  it  is  not  safe  to  rely  on  custom. 
All  provisions  of  the  contract  should  be  stated 
expressly. 

§  263.    Wages 

Wages  are  payable  by  the  day,  the  week,  or  the  month 
where  the  contract  expressly  provides  that  they  shall  be,  or 
where  it  is  the  custom  to  pay  in  that  way,  so  that  the  parties 
might  be  supposed  to  have  intended  to  make  it  part  of  their 
agreement.  If  there  were  no  such  custom  and  the  contract 
said  nothing  about  it,  the  employee  would  not  be  entitled  to  his 
wages  until  the  end  of  the  entire  period  for  which  the  contract 
was  to  run. 

The  custom  of  paying  wages  at  short  periods,  by  the  week 
or  month  for  example,  is  pretty  well  established.  If  the  parties 
desire  to  arrange  otherwise,  it  should  be  so  stated  in  the  con- 
tract. 

§  264.     Modification  of  Contract 

The  contract  of  employment,  like  every  other  contract,  may 
be  altered  by  the  consent  of  all  the  parties  to  it.  The  question 
of  whether  there  must  be  consideration  or  not,  or  what  con- 


3o6  EMPLOYMENT 

stitutes  consideration  for  the  new  contract,  has  already  been 
taken  up  under  the  subject  of  contracts  in  general.    (See  §  44. ) 

§  265.    When  Contract  Begins 

Where  the  contract  does  not  state  when  it  is  to  begin,  it 
begins  at  once,  or  as  soon  as  is  reasonable  under  the  circum- 
stances. For  instance,  if  a  man  is  employed  to  act  as  book- 
keeper for  a  business  which  has  not  yet  been  started,  he  will 
not  be  expected  to  begin  his  work  or  draw  his  salary  until  the 
business  starts. 

Note: 

I.     Both  parties  should  see  that  the  time  when  the  em- 
ployment is  to  begin  is  made  part  of  the  contract. 

§  266.    Termination  of  Contract 

Where  there  is  no  definite  time  fixed  for  the  contract  to 
end,  it  will  end  when  either  party  desires  to  terminate  it.  If  a 
definite  time  isi  fixed  for  the  payment  of  wages,  such  as  a 
day,  a  week,  or  a  month,  the  contract  will  last  for  at  least 
that  period  of  time,  and  cannot  be  terminated  before.  If  the 
employment  is  by  the  week,  month,  or  year,  it  cannot  be  ter- 
minated by  either  party  except  at  the  termination  of  such  a 
period.  If  the  employer  discharges  the  employee  (except  for 
good  cause)  before  the  end  of  such  a  period,  he  will  be  liable 
for  the  employee's  wages  until  the  end  of  the  period. 

If  the  employee  leaves  in  the  period,  he  will,  strictly,  for- 
feit all  claim  for  compensation.  Some  courts  allow  in  such 
cases  whatever  value  the  employee  can  show  for  his  services, 
less  any  damage  caused  by  his  leaving  before  his  time  was  up. 

Notes: 

I.     A  definite  understanding  as  to  the  duration  of  the 
employment  is  better  for  both  employer  and  em- 


THE  CONTRACT  OF  EMPLOYMENT  307 

ployee.  It  will  avoid  unpleasant  disputes  and  may 
save  a  lawsuit. 
2.  Both  employer  and  employee  should  act  fairly  about 
terminating  the  employment.  To  leave  without 
notice  at  end  of  period  or  to  discharge  without 
notice  at  end  of  period  is  in  most  cases  unfair. 

§  267.     Termination  of  Contract  by  Breach 

A  contract  of  employment  may  end  either  when  it  is  com- 
pleted, or  when  it  is  broken  by  either  of  the  parties  to  it. 

What  the  Employee  May  Do.  On  the  part  of  the  em- 
ployee, the  contract  may  be  broken  either  by  leaving  the 
employment  or  by  doing  something  which  wOuld  justify  his 
employer  in  discharging  him — by  acts  of  disobedience  or  insub- 
ordination, or  by  acting  contrary  to  his  employer's  interests. 

The  disobedience  or  insubordination  must  be  such  as  will 
prevent  the  employer  from  being  able  to  rely  on  the  employee 
to  do  good  work.  And  the  employee  is  under  no  obligation 
to  obey  an  order  to  do  anything  not  called  for  by  his  contract. 
A  department  store  owner  discharged  the  head  of  his  dress- 
making department  because  she  refused  to  obey  his  orders 
to  perform  the  work  of  a  seamstress.  The  court  held  the 
discharge  a  breach  of  contract. 

Either  incompetence  or  habitual  drunkenness  constitutes 
a  breach  of  the  contract.  The  employee  undertakes  to  be 
only  reasonably  competent,  however,  and  he  cannot  be  dis- 
charged for  not  being  an  expert,  unless  there  is  some  express 
understanding  calling  for  a  specified  degree  of  skill. 

An  illness  of  the  employee  which  keeps  him  from  work 
also  puts  an  end  to  the  contract,  though  it  may  hardly  be  re- 
garded as  a  breach. 

What  the  Employer  May  Do.  The  employer  may  break 
the  contract  either  by  discharging  the  employee  without  justi- 
fication, or  by  rendering  the  work  in  some  way  unsafe  to  his 


3o8  EMPLOYMENT 

health,  his  life,  or  his  morals.  Or  he  may  break  it  by  re- 
quiring the  employee  to  work  for  less  wages  than  were  agreed 
upon,  or  to  perform  different  services.  He  can  make  none 
of  these  requirements  without  the  employee's  consent. 

A  contract  of  employment  is  one  involving  personal  re- 
lations and  cannot  be  assigned  by  either  of  the  contracting 
parties.  Therefore,  if  the  employer  sells  out  his  business  to 
other  parties,  his  employees  cannot  be  compelled  to  work  for 
the  new  owner.  If  the  employer  takes  a  partner  and  forms 
a  new  firm,  or  if  a  firm  becomes  incorporated,  the  result,  so 
far  as  the  employees  are  concerned,  is  similar  to  assignment 
of  the  contract  to  a  third  party. 

The  bankruptcy  or  insolvency  of  the  employer  or  the  wind- 
ing up  of  his  affairs  by  a  public  officer,  as  in  the  case  of  a 
bank  or  an  insurance  company  in  danger  of  insolvency,  puts 
an  end  to  the  contract. 

The  fact  that  an  employer  has  no  work  for  an  employee 
will  not  justify  a  discharge  before  the  end  of  the  contract. 

Notes: 

1,  In  selling  out  a  business,  or  changing  the  nature  of 

a  business,  an  announcement  of  the  new  arrange- 
ment should  always  be  made  to  the  employees. 

2.  Remaining  in  the  employment  with  knowledge  of 

the  change  amounts  to  an  acceptance  of  the  new 
arrangement. 

§  268.     Rights  and  Remedies 

In  any  case,  except  where  the  employee  has  been  guilty 
of  actual  disloyalty  to  his  employer  by  engaging  in  compe- 
tition with  him,  or  has  offered  physical  violence  to  his  em- 
ployer, he  is  entitled  to  the  wages,  salary,  or  commissions 
which  he  has  already  earned,  and,  if  a  bonus  has  been  de- 
clared, he  is  entitled  to  that  too.     This  is  true  whether  the 


THE  CONTRACT  OF  EMPLOYMENT        309 

breach  of  the  contract  is  due  to  his  own  action  or  to  that  of 
his  employer.     (See  also  §  273.) 

Employee's  Rights  to  Damages.  Where  the  employer  is 
guilty  of  a  breach  of  the  contract,  the  employee  is  entitled  to 
damages.  He  may  sue  at  once  and  collect  what  is  already 
due  him,  or  he  may  wait  until  the  contract  period  is  over 
and  then  sue  for  the  total  damages  he  has  sustained.  It  is 
his  duty  to  try  to  obtain  other  employment,  and  the  damages 
which  he  may  recover  are  limited  to  the  difference  between 
the  wages  he  would  have  received  and  any  sums  which  he 
has  been  able  to  earn  since. 

Where  the  wages  or  salary  are  to  be  paid  at  stated  periods, 
the  courts  in  some  states  allow  the  employee  to  sue  at  the  end 
of  each  period  for  the  amount  then  due  him ;  as  for  instance, 
where  the  wages  are  payable  by  the  month,  at  the  end  of 
each  month.  In  other  states  the  employee  may  bring  only 
one  action,  and  if  he  sues  before  the  end  of  the  contract 
period  he  may  recover  only  such  damages  as  he  has  suffered 
up  to  that  time,  and  will  have  no  further  remedy. 

Where  a  contract  of  employment  provides  for  notice  on 
both  sides,  the  employer  must  give  the  required  notice  or  pay 
the  employee  wages  for  the  period  of  notice  before  discharg- 
ing him;  and  if  he  fails  to  do  this  the  employee  is  entitled  to 
recover  this  amount  as  damages. 

Employer's  Grounds  for  Damages.  If  the  employee  breaks 
the  contract,  the  employer  is  entitled  to  recover  any  damages 
he  can  prove.  He  must  prove  that  it  is  impossible  for  him  to 
procure  anyone  to  do  the  work  in  the  employee's  place.  He 
cannot  recover  any  damages  if  the  employee  leaves  his  em- 
ployment because  of  illness.  He  will  be  entitled  to  retain 
wages  equal  to  the  amount  of  notice  the  employee  is  required 
to  give,  only  in  case  there  was  such  a  provision  in  the  contract. 

Interfering  Between  an  Employer  and  Employee.  If  a 
third  person,  knowing  that  a  workman  is  employed  by  another 


3IO  EMPLOYMENT 

and  that  the  term  of  his  employment  is  not  over,  induces  an 
employee  to  leave  his  employer  before  the  contract  of  em- 
ployment has  expired,  the  third  person  is  responsible  to  the 
employer  in  damages  should  he  have  acted  with  full  knowledge 
of  the  circumstances. 

If  a  third  person  induces  an  employee  to  make  a  contract 
with  him  after  the  time  of  his  contract  with  his  employer  is 
up,  the  employer  has  no  cause  of  action.  Or,  if  the  employee 
has  broken  the  contract  himself  and  then  obtains  employment 
from  a  third  person,  the  employer  has  no  rights  against  the 
third  person. 

If  a  third  person  succeeds  in  getting  an  employer  to  dis- 
charge an  employee,  the  employee  has  a  right  of  action  against 
that  person.  But  if  the  third  person  merely  attempts  to  in- 
fluence the  employer  and  is  unsuccessful,  the  employee  has  no 
ground  for  action. 

References.  The  employee  has  no  legal  right  to  a 
reference.  But  nowadays  the  custom  of  giving  references  has 
become  in  some  places  so  universal  that  it  almost  amounts  to 
an  understood  part  of  the  contract. 

Note: 

I.  Contracts  providing  for  notice  should  specify  a 
definite  time  and  a  definite  amount  of  wages  to 
be  forfeited  on  the  part  of  the  employee  for 
failure  to  give  notice. 

§  269.    Employment  After  Expiration  of  Contract 

Where  the  contract  sets  a  definite  time  for  its  termination, 
and  the  employee  continues  in  the  employment  after  that  time 
without  any  new  understanding,  the  general  rule  is  that,  if 
the  work  which  he  is  doing  is  the  same,  he  is  supposed  to  have 
been  employed  on  the  same  terms. 

The  new  contract  in  such  case  will  be  for  the  same  time 


THE  CONTRACT  OF  EMPLOYMENT  311 

as  the  old.  For  instance,  if  a  workman  hired  for  a  year  re- 
mains in  his  employment  into  the  second  year  without  any 
new  agreement,  it  will  be  presumed  that  he  was  working  under 
an  agreement  for  another  year ;  and  it  will  be  a  breach  of  the 
contract,  for  which  the  employer  will  be  liable  in  damages,  if 
he  discharges  the  workman  before  the  end  of  this  time.  The 
employer,  however,  may,  if  he  can,  show  facts  to  prove  that 
there  was  no  such  understanding. 

Note: 

I.     In  this  case  again,  it  is  safer  to  have  a  definite 
understanding  about  any  renewal  of  the  contract. 


Review  Questions 

1.  What  is  the  distinction  between  an  employee  and  an  agent? 

2.  Is  a  salesman  working  on  commission  an  employee? 

3.  What  is  an  independent  contractor? 

4.  When  an  employee  is  working  by  the  week  or  month  and  leaves 

without  cause  during  the  period,  what  are  his  legal  rights  in 
your  state? 

5.  What  causes  would  justify  the  discharge  of  an  employee?     In 

such  cases  would  the  employee  be  entitled  to  compensation 
up  to  the  time  of  discharge? 

6.  What  causes  would  justify  an  employee  in  leaving  before  the 

expiration  of  his  period  of  employment? 

7.  In  what  ways  in  your  state  may  an  employee  seek  redress  for 

an  employer's  breach  of  contract  for  a  fixed  salary  payable 
at  regular  intervals? 


CHAPTER  XLI 

RELATIONS  OF  PARTIES 

§  270.     Duties  of  Employee  to  Employer 

The  employee  by  entering  into  the  contract  of  employment 
represents  himself  to  be  reasonably  competent  for  his  work. 
If  the  work  is  manual  labor,  he  is  not  required  to  have  any 
experience  and  must  be  given  a  reasonable  time  to  learn  its 
duties.  Where  the  work  requires  skilled  labor,  such  as  in 
handling  machinery,  etc.,  the  employee  is  required  to  be  rea- 
sonably and  ordinarily  competent.  If  any  high  degree  of  skill 
is  required,  it  must  be  stipulated  in  the  contract. 

A  case  is  on  record  where  a  baseball  club  engaged  a  pitcher 
without  any  definite  requirements  expressed  in  the  contract; 
and  when  they  tried  to  discharge  him  because  he  did  not  come 
up  to  what  they  expected  of  him,  the  court  made  them  pay 
damages,  because  it  could  not  be  proved  that  he  could  not 
pitch  as  well  as  the  average  professional  player.^ 

There  may  be  a  provision  in  the  contract  that  the  employee 
must  be  satisfactory  to  the  employer.  In  most  states  even 
then  the  employer  will  have  to  show  good  reasons  for  his  dis- 
satisfaction before  he  may  discharge  his  employee. 

The  courts  will  not  compel  an  employee  to  work  if  he 
refuses.  If  the  employer  can  prove  that  he  has  suffered  by 
the  breach  of  the  contract,  the  employee  is  liable  to  the  em- 
ployer in  damages,  but  there  is  no  way  of  forcing  an  unwilling 
employee  to  work. 

The  employee  must  perform  the  services  stipulated  in  the 


»  Baltimore  Baseball  Club  v.  Pickett,  78  Md.  377;  28  Atl.  279;  44  Am.  St.  Rep.  304; 
L.  R.  A.  690. 


RELATIONS  OF  PARTIES  313 

contract.  It  is  not  his  fault,  however,  if  their  value  to  the 
employer  is  destroyed  by  the  act  of  some  third  person,  and 
the  employer  is  none  the  less  bound  to  pay  him  the  wages 
agreed  upon  for  them.  For  instance,  in  a  certain  Alabama 
case  one  Parham  employed  a  man  named  Tucker  to  go  into 
Mississippi  and  get  back  some  slaves  for  him.  Tucker  got 
them  back  and  they  were  immediately  attached  by  a  creditor. 
Tucker  had  nevertheless  fulfilled  his  contract.^ 

Loyalty  and  Obedience.  Other  duties  which  the  employee 
owes  his  employer  are  those  of  loyalty  and  obedience.  He 
must  not  do  anything  which  may  injure  his  employer's  busi- 
ness, and  has  no  right  to  engage  in  any  employment  which 
is  in  competition  with  it.  Otherwise,  the  employee  has  a  right 
to  use  his  spare  time  as  he  likes,  unless  he  has  agreed  by  the 
contract  to  devote  his  entire  time  and  attention  to  the  business. 

Sometimes,  even  in  such  a  case,  it  has  been  held  that  the 
employee  has  a  right  to  do  something  else  which  does  not 
injure  his  employer  where  the  employer  fails  to  furnish  him 
with  work.  In  the  California  case  of  Stone  v.  Bancroft,' 
Stone,  a  publisher  who  had  been  employed  by  Bancroft  to 
devote  his  entire  time  to  publishing  the  historian's  works,  did 
some  work  on  a  medical  book  while  he  was  waiting  for  Ban- 
croft to  furnish  him  the  manuscript.  The  court  held  that 
Bancroft  could  not  complain,  since  he  had  given  no  work  to 
the  publisher.  Bancroft  was,  of  course,  liable  to  pay  him  at 
the  contract  rate  for  the  entire  period  of  the  engagement. 

Part  of  the  employee's  duty  of  fidelity  to  his  employer 
consists  in  keeping  to  himself  any  business  matters  of  a  con- 
fidential nature.  If  an  employee  discloses  any  secret  processes 
— what  are  known  as  "trade  secrets" — ^he  is  liable  to  his  em- 
ployer for  damages. 

Law  clerks  and  lawyers'  stenographers  are  privileged  from 


*  Wolfe   V.   Parham,    18  Ala.   441. 

»  139   Cal.   78   Pac.    1017;   72  Pac.   717. 


314  EMPLOYMENT 

testifying  on  the  witness  stand  to  any  confidential  communica- 
tions from  clients.  This  privilege  does  not  extend  to  ordinary 
stenographers,  bookkeepers,  or  clerks  on  the  witness  stand. 

Liability  of  Employer  in  Using  Force.  The  duty  of 
obedience  cannot  be  enforced  by  the  use  of  violence  on  the 
part  of  the  employer.  Formerly  a  master  was  allowed  to 
chastise  his  apprentice  on  the  ground  that  he  stood  in  loco 
parentis  (in  the  place  of  a  parent)  to  him.  But  there  is  no 
justification  for  an  employer  laying  his  hands  on  his  employee 
nowadays,  and  he  would  be  liable  to  an  action  for  assault 
and  battery  if  he  did  so. 

Inventions.  The  patent  rights  to  inventions  which  the 
employee  makes  in  the  course  of  his  work  belong  to  him  and 
not  to  his  employer,  but  it  is  probable  that  he  would  have  to 
give  the  employer  a  right  to  make  use  of  the  inventions.  It  is 
common  nowadays  for  employers  to  make  some  provision  in 
the  contract  of  employment  for  taking  over  inventions  made 
by  their  employees. 

Notes: 

i.  If  the  employer  wishes  anything  more  than  ordinary 
skill  from  his  employee,  he  must  include  the  re- 
quirement in  the  contract. 
2.  If  the  employer  wishes  to  make  any  arrangement 
about  inventions,  he  should  come  to  an  agreement 
with  his  employee  and  have  that  included  in  the 
contract. 

§  271.     Duties  of  Employer  to  Employee 

The  employer  owes  it  to  his  employees  to  provide  a  safe, 
healthful,  and  suitable  place  to  work  in,  and  proper  tools  to 
work  with.  To  do  this,  he  must  arrange  for  suitable  inspec- 
tion to  see  that  things  are  in  the  proper  condition  and  remain 
so.     And  it  is  his  duty  to  hire  competent  fellow-employees. 


RELATIONS  OF  PARTIES  315 

An  employee  is  not  required  to  expose  himself  to  the  danger 
of  working  with  drunken,  reckless,  or  incompetent  asso- 
ciates. 

Responsibility  of  Employer,  These  duties  of  the  employer 
cannot  be  shirked.  He  is  always  responsible  for  failure  to 
perform  them,  no  matter  whom  he  appoints  to  attend  to  them. 
He  must  keep  buildings,  etc.,  in  proper  repair,  examine  ma- 
chinery to  see  that  there  are  no  dangerous  defects  in  it,  and 
inspect  everything  that  comes  to  him  from  any  other  person 
to  see  that  it  is  in  safe  condition  before  giving  It  to  his  em- 
ployees to  work  with. 

Co-operation  of  Employees  with  Employers.  The  law  is 
reasonable.  The  employer  is  not  responsible  for  an  injury 
arising  from  an  unknown  defect,  if  he  has  used  reasonable 
and  proper  inspection.  He  cannot  be  required  to  be  continu- 
ally inspecting ;  therefore  it  is  the  duty  of  employees  to  inform 
the  employer  of  any  defects  which  they  notice.  If  they  do 
not,  and  suffer  injuries,  they  must  usually  take  the  conse- 
quences; but  at  the  same  time  the  employer  is  in  a  better 
position  to  be  aware  of  defects  than  the  employee,  and  where 
the  defect  is  a  hidden  one,  it  is  the  employer's  and  not  the 
employee's  business  to  discover  it. 

It  might  be  well  to  state  that  there  are  many  regulations 
(hours,  sanitation,  etc.)  which  the  statutes  of  each  state  re- 
quire, and  that  often  it  is  required  to  post  a  copy  of  the  law 
on  the  walls  of  store  or  factory.  (See  also  §§  279,  280,  on 
employers'  liability  and  workmen's  compensation  acts.) 

Limits  of  Liability.  The  employer  will  not  be  liable  for 
the  consequences  of  defects  which  nobody  could  have  fore- 
seen and  prevented,  such  as  the  flying  off  of  slivers  of  steel 
from  crystallization,  a  defect  which  cannot  be  discovered  with- 
out a  chemical  test  and  the  breaking  up  of  the  steel  in  order  to 
perform  it.  And  he  is  not  obliged  to  employ  experts  specially 
to  make  chemical  and  other  scientific  tests.     He  is  required 


3l6  EMPLOYMENT 

to  make  only  the  ordinary  tests  employed  by  those  engaged 
in  that  occupation. 

If  an  employee  is  competent  when  hired  and  afterwards 
becomes  reckless,  drunken,  or  incompetent,  and  his  acts  take 
place  without  the  knowledge  of  the  foremen  or  superintend- 
ents, though  these  exercise  reasonable  supervision,  the  em- 
ployer cannot  be  made  liable  for  the  consequences  of  such 
acts. 

Provision  for  Work.  The  employer  must  provide  enough 
tools  and  employees  to  perform  the  work  with  safety  to  all. 
And  he  must  make  proper  rules  for  the  conduct  of  the  work 
and  see  that  they  are  carried  out.  Where  the  law  requires 
safety  appliances,  seats  for  women,  etc.,  the  employer  must 
comply  with  it;  but  in  the  absence  of  any  statute  on  the  subject 
he  is  not  required  to  use  the  latest  and  best  appliances  If  those 
which  he  has  are  such  as  are  in  ordinary  use  and  are  reason- 
ably safe. 

Instruction  of  Employees.  It  is  his  duty  to  instruct  young 
and  inexperienced  employees  in  the  proper  way  to  make  use 
of  tools  and  machinery,  and  to  warn  them  of  any  dangers. 
He  is  not  responsible  if  his  employees  disobey  his  orders  and 
are  injured  in  consequence ;  but  if  their  disobedience  has  been 
going  on  for  some  time,  so  that  it  ought  to  have  been  known 
to  the  foremen  and  others  in  charge  if  they  had  been  reason- 
ably diligent  in  their  duties,  or  if  it  has  been  going  on  with 
their  knowledge  and  consent,  the  employer  will  be  considered 
to  have  consented  to  it  and  will  be  responsible  for  resulting 
injuries  as  though  the  rules  had  never  been  made. 

If  he  allows  young  and  inexperienced  employees  to  work 
in  places  which  tempt  them  to  take  risks,  it  has  been  held 
that  he  will  be  responsible  for  any  injuries  they  may  suffer 
in  consequence.  A  case  illustrating  this  point  was  that  of  a 
young  boy  set  to  work  turning  a  wheel  near  the  log  carriage 
in  a  saw  mill.     The  court  said  that  it  was  tempting  him  to 


RELATIONS  OF  PARTIES  317 

follow  his  natural  instincts  to  ride  up  and  down  on  the  log 
carriage,  and  that  the  employer  was  responsible  for  injuries 
for  putting  him  in  such  a  place.* 

Employees  Must  Take  Reasonable  Care.  After  the 
employer  has  seen  to  the  furnishing  of  sufficient  and  proper 
tools  and  a  safe  place  to  work,  he  is  not  responsible  if  the 
workmen  themselves  misuse  them.  When  unfinished  appli- 
ances, such  as  molds  furnished  in  two  or  more  parts  to  be 
put  together,  or  lumber  furnished  for  making  a  scaffold,  are 
given  to  the  workmen  to  be  put  together,  if  the  men  do  the 
work  improperly  the  injuries  are  not  the  employer's  fault. 
But  a  permanent  scaffold,  such  as  those  which  are  used  to 
hold  up  steel  framework  until  it  is  entirely  finished,  is  part 
of  the  place  to  work.  The  employer  would  be  responsible  for 
its  safety  to  any  workmen  other  than  those  who  erected  the 
scaffold. 

Where  the  workmen  furnish  tools  and  appliances,  the  em- 
ployer is  not  responsible  for  the  condition  of  such  tools,  nor 
for  accidents  which  may  result  from  using  them. 

Necessity  for  Inspection.  Where  the  work  is  construction 
work,  so  that  the  workmen  are  constantly  altering  it  them- 
selves, the  employer  is  liable  only  for  proper  and  reasonable 
inspection  from  time  to  time,  and  not  for  accidents  that  occur 
from  some  alteration  the  men  have  made  themselves.  But 
when  men  are  working  in  a  position  of  danger  where  they 
cannot  be  at  the  same  time  on  the  lookout  for  the  danger  and 
engaged  in  work,  someone  must  be  stationed  to  warn  them. 
And,  in  the  case  of  railway  work,  where  there  are  low  bridges 
which  are  dangerous  to  brakemen  who  must  ride  on  top  of 
freight  cars  in  order  to  look  after  the  brakes,  some  system  of 
"tell-tales"  or  signals  to  warn  them  to  stoop  and  avoid  danger 
is  necessary. 

Further  Liabilities  of  Employers.    Employees  are  entitled 


<  Marbury  Lumber  Co.  v.  Westbrook,  121  Ala.  179;  25  So.  793;  77  Am.  St.  Rep.  17. 


3l8  EMPLOYMENT 

to  all  of  this  protection  not  merely  while  they  are  at  work, 
but  also  while  they  are  coming  to  or  going  from  their  work 
over  the  employer's  premises.  Where  a  railroad  company 
runs  its  trains  over  tracks  belonging  to  another  company,  and 
an  employee  is  injured  in  an  accident  due  to  defects  in  the 
track,  the  company  is  nevertheless  liable  to  the  employee.  It 
is  as  much  its  business  to  inspect  and  see  that  the  tracks  over 
which  it  requires  its  employees  to  pass  are  in  good  condition, 
as  it  is  for  it  to  inspect  cars  which  it  receives  from  another 
company  to  see  that  they  are  In  good  condition  before  allow- 
ing the  employees  to  handle  them. 

If  an  employee  of  the  company  which  owned  the  tracks 
were  injured  by  any  carelessness  in  running  a  train  of  the 
renting  company,  however,  the  company  that  owned  the  train 
and  not  his  own  company  would  be  liable  to  him  for  his  in- 
juries. His  own  company  could  have  no  control  over  the 
other  company's  trains,  while  the  renting  company  would  have 
control  over  the  tracks  it  had  rented. 

Special  Contracts.  It  is  not  safe  for  an  employer  to  rely 
on  special  contracts  relieving  him  from  liability.  They  are 
generally  contrary  to  some  special  statute,  such  as  the  Work- 
men's Compensation  Act,  for  instance,  or  else  will  be  held 
contrary  to  public  policy. 

Notes: 

1.  The  careful  employer  makes  use  of  all  the  safe- 

guards possible  for  his  employees,  not  merely  as 
a  matter  of  humanity,  but  as  the  cheapest  policy 
in  the  end. 

2.  The  theory  of  the  law  in  the  matter  of  safeguards 

is  excellent.  The  practice  in  many  cases  is  bad. 
The  workman  is  not  usually  able  to  enforce  the 
law  against  his  employer  and  loses  his  job  if  he 
tries. 


RELATIONS  OF  PARTIES  319 

§  272.     Presumption  with  Regard  to  Joint  Owners 

When  a  party  is  hired  to  work  in  an  enterprise  in  which 
two  or  more  parties  are  jointly  interested,  the  presumption 
is  that  he  is  the  employee  of  both,  and  may  hold  either  or 
both  liable  for  the  duties  owed  to  him  by  an  employer. 

In  one  case,  an  employee  was  hired  by  Rumsey,  one  of 
the  joint  owners,  to  work  on  a  steamboat,  and  received  all 
his  instructions  from  him.  McMahon,  the  other  joint  owner, 
never  came  on  the  boat  nor  had  any  relations  with  the  em- 
ployee. But  the  court  held  him  liable  for  damages  for  injuries 
to  the  employee.* 

§  273.    Wages 

Wages  are  the  compensation  which  the  employee  receives 
for  his  services.  He  may  be  paid  in  the  form  of  a  salary,  or 
a  fixed  wage,  or  "by  the  piece" ;  that  is,  the  employee  may  be 
paid  a  certain  fixed  amount  per  dozen,  etc.,  for  the  work  he 
turns  out.  He  may  be  paid  in  the  form  of  commissions, 
i.e.,  a  per  cent  of  the  price  of  goods  sold,  or  of  the  amount  of 
an  insurance  policy,  etc.  The  amount  of  wages  is  determined 
by  the  agreement. 

Where  the  wages,  or  part  of  the  wages,  consist  of  net 
profits,  the  amount  of  the  employee's  salary  must  not  be  de- 
ducted from  the  gross  profits  in  computing  them.  Nor  may 
interest  on  temporary  loans  be  deducted.  The  employer  can- 
not take  out  for  himself  interest  on  his  investment,  before 
computing  the  net  profits.^ 

Wages  must  be  distinguished  from  a  bonus.  A  bonus  is 
really  a  gift  made  by  the  employer  to  the  employee.  He  may 
give  it  in  the  form  of  a  reward  for  good  work  or  may  divide 
a  certain  percentage  of  the  profits  among  the  employees  at 
Christmas;  but  in  either  case  it  is  merely  a  gift  and  not 


•McMahon  v.  Davidson,  12  Minn.  357. 

•Morrow  v.  Murphy,  120  Mich.  204;  79  N.  W.  193;  80  N.  W.  253. 


320  EMPLOYMENT 

anything  which  the  employee  has  earned  under  his  contract 
of  employment.  If  the  bonus  was  specified  in  the  contract  of 
employment,  so  that  when  earned  the  employee  could  bring 
suit  for  it,  it  would  be  a  misnomer  to  call  it  a  bonus.  It  would 
be  earned  compensation. 

The  employee  is  entitled  to  the  wages  which  he  has  already 
earned  even  though  his  employer  discharges  him  for  good 
cause,  unless  he  was  guilty  of  bad  faith  and  attempted  to 
injure  his  employer's  business  or  use  physical  violence 
against  his  employer.  A  superintendent  who  had  attempted 
to  sell  blooded  cattle  belonging  to  his  employer  for  less  than 
they  were  worth  was  refused  the  right  to  recover  unpaid 
wages. '^ 

Some  states  provide  by  law  that  wages  must  be  paid  in 
cash  and  make  it  a  criminal  offense  to  attempt  to  pay  in  orders 
on  the  company's  store  or  merchandise.  But  even  under  such 
laws,  the  custom  of  issuing  time  checks  which  are  redeemable 
in  money,  where  the  pay-days  are  put  at  reasonable  intervals 
and  not  made  purposely  inconvenient  to  force  the  laborers  to 
accept  time  checks,  is  permissible. 

Distinction  Between  Wages  and  Salaries.  These  laws  are 
generally  made  for  the  benefit  of  laborers  and  do  not  apply 
to  clerical  workers  who  draw  salaries  as  distinguished  from 
wages.  In  the  same  way,  the  wage-earners,  but  not  the  salary- 
earners,  are  given  in  most  states  the  right  to  collect  their 
wages  through  enforcing  a  lien  on  the  employer's  property. 

The  distinction  is  made  in  regard  to  manual  labor  as  op- 
posed to  any  other  sort.  Typesetters  and  printers  come  under 
the  head  of  manual  labor;  bookkeepers  and  proofreaders  do 
not. 

Overtime.  The  law  regulating  the  hours  of  labor  gives 
the  employer  no  right  to  overtime  on  the  part  of  the  workman 
unless  it  expressly  says  so.     Generally,  it  is  absolutely  for- 

'Von  Heyne  v.  Tomkins,  89  Minn.  77;  93  N.  W.  901;  5  L.  R.  A.  N.  S.  534. 


RELATIONS  OF  PARTIES  32 1 

bidden  to  allow  employees  on  public  works  to  work  more  than 
the  time  specified,  i.e.,  eight  hours  a  day  in  New  York,  and 
private  employees  may  refuse  to  work  for  a  longer  time.  If 
employees  work  overtime  without  an  express  agreement  for 
additional  wages,  they  are  not  entitled  to  them,  and  if  the 
employer  permits  them  to  work  less  than  the  specified  number 
of  hours  in  any  day,  he  is  not  entitled  to  require  them  to  make 
it  up. 

Where  a  contract  of  employment  expires  and  the  employee 
continues  to  work  without  any  new  contract,  if  he  is  perform- 
ing the  same  kind  of  services  as  before,  he  will  be  entitled 
to  the  same  wages. 

Notes: 

1.  The  agreement  for  wages  should  not  be  left  in- 

definite as  to  hours,  overtime,  etc. 

2.  The  disadvantage  of  the  single  laborer  in  any  dis- 

pute with  his  employer  has  caused  the  develop- 
ment of  the  labor  union  and  much  labor  legislation. 

3.  A  minor  has  usually  no  right  to  his  own  wages,  con- 

sequently an  employer  should  not  pay  them  to  him 
without  his  father's  consent,  or  he  may  find  him- 
self under  an  obligation  to  the  father.  The  wages 
should  be  paid  to  the  father,  or  his  written  con- 
sent to  their  payment  to  the  minor  obtained.  In 
New  York  the  statute  requires  the  father  to  give 
notice  if  he  claims  wages. 

§  274.     Fines,  Deductions,  etc. 

Fines  can  be  imposed  only  for  offenses  in  the  course  of 
the  work.  In  the  case  of  Cross  v.  Detroit  Baseball  Club,^ 
Cross  was  fined  $75  for  using  bad  language  in  an  argument 


» 84    Mo.    App.    526. 


322  EMPLOYMENT 

with  the  manager  at  a  distance  from  the  grounds.  The  court 
refused  to  allow  the  club  to  collect  the  fine. 

Deductions  of  wages  for  leaving  without  giving  notice 
must  be  reasonable  in  amount.  The  courts  have  held  that 
indefinite  deductions  of  all  wages  then  due  are  unjust,  because 
they  give  the  employer  a  chance  to  take  advantage  of  his  em- 
ployees by  withholding  their  wages  for  long  periods  of  time. 

Fines  for  offenses  must  be  agreed  to  by  the  employee. 
They  should  be  mentioned  in  the  agreement  of  employment, 
or  posted  in  the  rules  in  a  conspicuous  place;  and  the  em- 
ployee's attention  must  be  called  to  them  so  emphatically  that 
he  cannot  say  that  he  was  ignorant  of  what  they  were.  Merely 
posting  up  rules  without  calling  them  to  the  employee's  at- 
tention ':s  insufficient. 

Notes: 

1 .  In  making  an  agreement  that  wages  may  be  deducted 

if  the  employee  leaves  without  giving  notice,  the 
exact  amount  to  be  deducted  should  always  be 
stated.  It  should  be  a  reasonable  amount,  as 
otherwise  the  courts  may  hold  the  agreement  un- 
fair and  refuse  to  enforce  it. 

2.  Where  fines  are  to  be  imposed,  it  is  best  to  have  a 

printed  copy  of  the  rules  imposing  them  made  a 
part  of  the  contract  of  employment,  or  given  to 
the  employees  with  an  announcement  that  these 
are  rules  for  fines  which  they  should  read  care- 
fully. If  any  of  the  employees  are  illiterate,  the 
rules  should  be  explained. 

Review  Questions 

1.  What  degree  of  skill  must  an  employee  have? 

2.  Has  an  employer  any  rights  in  regard  to  the  spare  time  of  the 

employee  ? 


RELATIONS  OF  PARTIES  323 

3.  Is   a   bookkeeper   privileged    from   testifying   as   to   confidential 

information? 

4.  What  is  the  law  as  to  inventions  made  by  an  employee,  where  no 

provision  has  been  made  in  the  contract? 

5.  What  are  the  obligations  of  the  employer?     If  he  fails,  what 

is  the  consequence? 

6.  What  circumstances  would  justify  discharge  and  forfeiture  of 

wages  due? 

7.  May  employees  be  fined  for  coming  late? 


CHAPTER  XLII 

EMPLOYER'S  RESPONSIBILITY 

§  275.     Introductory 

Under  the  common  law,  the  employer's  responsibility  for 
injuries  to  his  employees  was  reduced  to  a  minimum. 

1.  "The  rule  as  to  the  assumption  of  risk"  held  that  if 
the  defects  of  equipment  were  such  that  the  employee  could 
see  them,  he  assumed  all  the  risk  by  taking  employment.  As 
a  man  who  needed  work  was  not  in  a  position  to  reject  it 
because  equipment  was  unsafe,  the  doctrine  prevented  a  multi- 
tude of  injured  workmen  from  receiving  damages.  (See 
§276.) 

2.  "The  rule  as  to  contributory  negligence"  relieved  the 
employer  from  any  responsibility  if  the  workman  had  himself 
been  in  any  way  careless.  Many  a  crippled  worker  was  de- 
feated in  the  courts  by  reason  of  this  rule.     (See  §  2.']'].^ 

3.  "The  rule  as  to  fellow-servants"  was  a  particularly 
unjust  regulation.  If  the  carelessness  or  negligence  of  a  fel- 
low workman  caused  the  injury,  the  hurt  man  had  no  com- 
pensation. He  did  not  hire  the  men  with  whom  he  worked, 
but  the  law  held  that  if  he  chose  to  work  with  them,  and 
they  were  careless  or  incompetent,  the  employer  who  had  hired 
them  was  relieved  of  all  responsibility.     (See  §  278.) 

The  injustice  of  these  rules  and  the  disadvantage  to  the 
injured  workman  when  he  tried  to  enforce  his  rights  in  the 
courts,  have  led  to  the  passage  of  many  laws  designed  to 
remedy  the  conditions.    There  are  two  classes  of  these  laws: 

I.     The  employers'  liability  laws,  which  aim  to  define  the 

324 


.  EMPLOYER  S   RESPONSIBILITY  325 

employers'  liability  and  to  modify  or  remove  the 
objectionable  common  law  rules. 
2.     The  workmen's  compensation  laws,  which  try  to  sys- 
tematize the  responsibility  for  injury  and  to  provide 
something   in    the   nature    of    insurance    for   the 
wounded  and  bereaved  in  the  fields  of  industry. 
These  laws  proceed  on  the  theory  that  if  a  workman  is 
injured  from  any  cause,  there  is  a  loss  that  someone  must 
stand.     In  such  a  case,  it  seems  that  the  particular  industry 
should  care  for  those  who  were  injured  in  it,  and  that  the 
care  for  the  injured  should  be  made  part  of  the  expenses  of 
the  business,   so  that  careless  and  conscienceless  employers 
would  not  be  allowed  to  shirk  responsibility. 

§  276.     Doctrine  of  Assumption  of  Risk 

This  rule  of  law  still  holds  in  many  states  where  there  is 
no  workmen's  compensation  act,  or  where  the  workmen's 
compensation  act  does  not  cover  all  kinds  of  employment. 

The  doctrine  holds  that  if  there  are  dangers  in  the  busi- 
ness which  are  sufficiently  obvious  for  the  employee  to  notice 
and  recognize,  he  assumes  the  risk  of  accidents  which  may 
arise  from  them,  and  the  employer  is  not  liable  for  his  injuries. 
The  same  would  be  true  if  the  workman  afterwards  discovered 
dangers  and  remained  in  the  employment  without  the  em- 
ployer's promising  to  remedy  them. 

If  the  employer  assures  an  employee  that  his  work  in- 
volves no  danger,  the  latter  cannot  be  held  to  have  assumed 
the  risk.  For  instance,  in  Wurtemberger  v.  Metropolitan  St. 
R.  Co.,  a  foreman  laughed  at  a  workman  when  he  told  him 
that  a  jack  was  unsafe,  and  said  to  the  rest,  "Here  is  a  green- 
horn, and  he  thinks  that  jack  is  unsafe."  ^  Wurtemberger  was 
held  to  have  a  right  to  damages  for  the  injury  subsequently 
received.     (See  also  §§  279,  280.) 


'  68  Kansas  642. 


326  EMPLOYMENT 

§  277.     Doctrine  of  Contributory  Negligence 

This  rule  holds  that  if  the  carelessness  of  the  injured  em- 
ployee in  any  way  contributed  to  the  accident  which  caused 
the  injury,  the  employer  will  not  be  held  responsible.      •  . 

It  makes  no  difference  that  the  carelessness  of  the  employee 
was  unintentional  or  the  result  of  a  mistake.  For  instance, 
in  one  case,  an  employee  thought  he  was  walking  on  a  side 
track  instead  of  the  main  track  and  continued  walking  along 
it  until  a  train  struck  him.^  He  was  not  permitted  to  recover 
damages. 

In  another  case,  a  brakeman  named  Quirouet  left  the 
brakes  set  on  a  freight  car.  Then,  instead  of  waiting  for  the 
caboose  which  had  steps  on  it,  he  tried  to  climb  up  and 
turn  ofif  the  brakes  so  as  to  prevent  the  wheels  from  bursting 
and  wrecking  the  train.  He  was  injured  while  attempting  to 
climb  up  in  this  way,  and  was  not  permitted  to  recover 
damages.^ 

Some  states  now  have  a  doctrine  of  comparative  neg- 
ligence. Sometimes  the  accident  was  primarily  due  to  the 
carelessness  of  the  employer  or  to  his  neglect  to  perform  the 
duties  which  he  owed  to  the  employee,  but  the  employee's  own 
carelessness  had  something  to  do  with  it.  In  this  case  the 
jury  must  determine  what  damages  are  due  the  employee  for 
the  injury,  and  then  decide  what  relation  his  carelessness  bore 
to  the  employer's  carelessness  or  neglect  of  duty,  and  award 
him  a  proportionate  amount  of  the  damages.  (See  also 
§§  279,  280.) 

§  278.     The  Fellow-Servant  Rule 

The  fellow-servant  rule  means  that  the  employee  cannot 
hold  his  employer  for  damages  if  the  injury  was  due  to  the 
act  of  a  fellow-servant  or  a  fellow  employee.     This  rule,  with 


'  Vreeland  v.  Chicago,  etc.,  R.  Co.,  92  Iowa  279;  60  N.  W.  54-2. 
•Quirouet  v.   Ala.   Great  Southern  R.  Co.,   in   Ga.   315;  36  S.  E.   599. 


EMPLOYER  S   RESPONSIBILITY  327 

the  doctrines  of  assumption  of  risk  and  contributory  negli- 
gence, is  rapidly  being  done  away  with. 

In  some  states  the  harshness  of  the  old  law  has  been  miti- 
gated by  the  so-called  superior  servant  rule.  That  is,  if 
the  fellow-employee  was  a  superintendent  or  someone  in  a 
position  of  authority,  he  is  not  regarded  as  a  fellow-servant 
and  the  employer  is  responsible  for  his  carelessness.  In  some 
states,  only  an  employee  who  has  the  power  to  hire  and  dis- 
charge is  regarded  as  being  a  superior  servant ;  while  in  others, 
any  position  of  authority  which  gives  him  the  power  to  con- 
trol the  actions  of  the  men  is  sufficient  to  insure  his  status 
under  the  superior  servant  rule.     (See  also  §§  279,  280.) 

§  279.     Employers'  Liability  Acts 

Employers'  liability  acts  have  been  passed  to  define  and 
increase  the  liability  of  the  employer  for  injuries.  Most  of 
them  do  away  with,  or  at  least  modify,  some  of  the  old  rules 
excusing  the  employer  from  liability.  The  doctrine  of  the 
assumption  of  risk  has  generally  been  greatly  modified,  and 
the  duties  of  the  employer  to  guard  against  accident  have 
been  increased.  In  New  York,  for  instance,  the  employee 
assumes  only  such  risks  as  may  still  remain  after  the  employer 
has  taken  care  to  discover  and  remedy  all  defects,  and  has 
complied  with  all  laws  requiring  safety  devices. 

It  is  under  these  acts  that  the  doctrine  of  comparative 
negligence  has  been  introduced. 

Differences  in  Liability  Acts.  In  order  to  know  just  what 
the  effect  on  the  old  rules  is,  it  is  necessary  to  consult  the 
particular  liability  act  of  each  state,  as  the  acts  differ  some- 
what. Some  of  the  acts  apply  only  to  special  classes  of  work- 
men, such  as  miners;  while  others  exclude  certain  classes, 
such  as  farm  laborers.  For  information  in  regard  to  this 
also,  it  .will  be  necessary  to  consult  the  particular  act  in 
question. 


328  EMPLOYMENT 

As  a  usual  rule,  these  acts  provide  that  the  employees  of 
a  subcontractor  are  to  be  considered  as  the  employees  of  the 
contractor  also,  for  the  purpose  of  claiming  compensation  for 
injuries  under  the  act.     (See  §§  259,  260.) 

Notice  of  Accident — Time  Limits.  In  order  to  obtain  the 
benefits  of  bringing  suit  under  the  act,  the  employee  must 
give  his  employer  a  notice — usually  it  must  be  written — of 
the  time,  place,  and  cause  of  the  accident.  The  employee  may 
either  serve  the  notice  personally  or  send  it  by  mail  to  the 
employer's  last  known  address.  This  notice  must  be  given 
within  a  certain  limited  time  after  the  happening  of  the  acci- 
dent. The  time  varies  in  the  different  acts,  and  there  is 
generally  some  provision  allowing  the  employee  a  certain  ex- 
tension of  time  in  case  of  mental  or  physical  incapacity,  so 
that  he  may  send  the  notice  after  the  incapacity  has  been 
removed.  The  action  must  be  brought  within  a  certain  time 
from  the  happening  of  the  accident,  generally  varying  from 
one  to  two  years. 

Death  of  Employee — Cause  of  Action.  In  case  of  the 
employee's  death  from  his  injuries,  these  laws  give  a  cause 
of  action  to  his  personal  representative,  i.e.,  executor  or  ad- 
ministrator, or  to  his  surviving  relatives,  to  recover  damages 
for  the  injury  these  relatives  have  suffered  by  his  death.  In 
such  a  case,  the  executor  or  administrator  is  allowed  a  certain 
period  of  time  after  his  appointment  in  which  to  give  to  the 
employer  the  notice  mentioned  above. 

This  right  of  action  in  case  of  death  is  distinct  from  the 
right  of  the  employee  to  sue  for  injuries.  The  employee  may 
recover  damages  for  his  injuries ;  his  representatives  may  re- 
cover only  damages  caused  to  them  by  his  death.  But,  as  a 
sort  of  additional  penalty  to  the  employer,  the  state  of  Massa- 
chusetts allows  the  surviving  relatives  to  recover  damages 
for  conscious  suffering  enduring  by  the  employee  before  his 
death. 


EMPLOYER  S   RESPONSIBILITY  329 

In  order  to  take  advantage  of  these  acts,  the  rules  as  to 
the  notice  and  the  time  within  which  the  action  may  be  brought 
must  be  strictly  observed.  If,  through  failure  to  comply  with 
them,  the  new  right  of  action  under  the  act  is  lost,  the  em- 
ployee still  has  his  old  action  at  common  law  for  the  injury 
which  he  has  suffered,  provided  that  it  has  not  become  out- 
lawed also  by  lapse  of  time;  the  employee  would,  of  course, 
stand  a  much  better  chance  of  recovering  if  he  sued  under 
the  act.  His  relatives  in  case  of  his  death  have  only  the  action 
given  them  by  the  statute.  If  they  fail  to  take  advantage  of 
this  action,  their  remedy  is  gone. 

Some  of  these  acts  have  been  superseded  by  the  workmen's 
compensation  act  discussed  in  the  next  section.  In  other  states, 
as  in  New  York,  the  workmen's  compensation  act  applies  only 
to  certain  employments,  leaving  the  rest  to  come  under  the 
employers'  liability  act. 

The  Federal  Employers'  Liability  Act.  This  act  applies  to 
all  the  railroads  engaged  in  the  business  of  interstate  com- 
merce throughout  the  country.  It  also  applies  to  all  railroads 
in  the  possession  of  the  United  States,  such  as  those  of  the 
Philippines  and  Porto  Rico,  and  in  the  District  of  Columbia. 
Where  the  railroads  are  engaged  in  both  interstate  and  intra- 
state commerce  (that  is,  both  commerce  which  crosses  the 
state  lines  and  that  which  is  carried  on  wholly  within  the 
state),  in  order  to  take  advantage  of  the  law's  provisions 
the  employee  must,  of  course,  himself  have  been  assisting 
in  the  business  of  interstate  commerce  at  the  time  the  accident 
occurred. 

However,  a  railroad  company  in  contributing  to  an  em- 
ployees' accident  fund  may  lawfully  make  the  condition  that 
if  the  employee  accepts  any  benefit  under  the  fund,  he  thereby 
gives  up  his  right  to  bring  suit.  He  does  not  make  his  choice 
as  to  whether  he  will  accept  the  benefit  or  will  bring  suit,  until 
after  the  injury  has  taken  place. 


33©  EMPLOYMENT 

Notes: 

1.  In  attempting   to   claim   damages   under   any   em- 

ployers' liability  act,  if  it  is  proposed  to  bring  an 
action,  consult  a  reputable  lawyer,  who  will  be 
able  to  attend  to  all  the  necessary  formalities  and 
to  secure  for  the  injured  employee  his  proper 
rights  whether  by  suit  or  by  compromise  of  the 
claim. 

2.  If  you  intend  to  sue,  do  not  accept  any  benefits 

from  insurance  funds  connected  with  the  com- 
pany without  first  consulting  a  lawyer. 

§  280.     Workmen's  Compensation  Acts 

With  all  the  protections  and  safeguards  that  can  be  devised 
by  science  and  required  by  law  to  protect  the  employee,  there 
will  always  be  certain  occupations  which  in  their  very  nature 
are  dangerous  to  life  and  limb.  Such  are  mining,  building, 
railroading,  working  in  atmospheres  clouded  by  fine  dust  or 
gas  fumes,  etc.  In  the  past,  the  loss  of  life  and  health  in  these 
industries  reached  alarming  proportions.  It  has  been  reduced 
somewhat  by  the  modem  tendency  to  require  safeguards,  but 
the  fact  remains  that  these  industries  are  all  the  time  "scrap- 
ping" humanity. 

Since  employees  injured  in  these  occupations  seldom  earn 
wages  large  enough  to  permit  them  to  provide  for  the  future, 
the  burden  of  taking  care  of  them  and  of  their  dependents 
has  fallen  in  a  large  measure  on  the  community.  It  seemed 
more  just  to  make  the  industries  which  caused  the  injuries 
pay  the  expenses  than  to  let  the  burden  fall  on  the  employee 
or  on  the  community  as  a  whole. 

In  consequence,  both  here  and  abroad  there  has  grown 
up  in  recent  years  a  system  known  as  workmen's  compensa- 
tion. 


employer's  responsibility  331 

It  is  part  of  good  bookkeeping  to  carry  a  depreciation 
account  to  cover  the  wear  and  tear  on  mechanical  machinery 
in  a  manufacturing  business  as  a  part  of  the  cost  of  the 
product.  The  time  has  come  when  provision  must  be  made 
for  the  wear  and  tear  on  the  human  machinery  engaged  in 
the  industry  which  is  quite  as  much  a  part  of  the  cost  of 
production  as  is  the  wear  and  tear  on  the  plant.  We  are 
accordingly  getting  Workmen's  Compensation  Laws  to  pro- 
tect the  laborer  to  a  slight  extent  against  accident  and  to 
provide  for  his  family  in  case  of  death  in  the  course  of  his 
employment.* 

The  essential  feature  of  this  system  is  that  there  is  estab- 
lished a  scale  of  compensation  for  different  kinds  of  injuries, 
by  which  payments  are  usually  made  at  regular  intervals  ex- 
tending over  some  period  of  time.  The  payment  must  be 
made,  as  a  general  rule,  regardless  of  who  was  to  blame  for 
the  accident,  except  where  the  employee  wilfully  and  inten- 
tionally brought  the  injury  on  himself,  or  where  it  came  about 
as  the  direct  result  of  his  intoxication. 

§  281.     Modern  Statutory  Law 

In  New  York  State,  the  compensation  law'  enumerates 
some  forty  groups  of  hazardous  employments.  The  scope  of 
the  law  is  widened  by  including,  as  the  last  group: 

All  other  employments  not  hereinbefore  enumerated  car- 
ried on  by  any  person,  firm  or  corporation  in  which  there 
are  engaged  or  employed  four  or  more  workmen  or  opera- 
tives regularly,  in  the  same  business  or  in  or  about  the 
same  establishment,  either  upon  the  premises  or  at  the  plant 
or  away  from  the  plant  of  the  employer,  under  any  contract 
of  hire,  express  or  implied,  oral  or  written,  except  farm 
laborers  and  domestic  servants. 

In  addition,  it  is  provided  that  any  employer  not  coming 
under  the  provisions  of  the  law,  or  having  some  employees 
who  do  not,  may  choose  to  accept  the  law  of  his  own  accord. 


*  Samuel    Untermeyer. 

•As   in   effect   July    i,    1919. 


332  EMPLOYMENT 

In  other  states,  it  applies  to  all  occupations,  or  to  all  occu- 
pations with  a  few  exceptions,  such  as  farming  or  domestic 
service.  In  New  Jersey  the  act  applies  to  all  classes  of  em- 
ployees, including  farm  hands  and  domestic  servants. 

The  injury  must  be  one  arising  out  of  the  employment. 
For  instance,  in  a  New  Jersey  case  a  workman  named  HuUy 
slipped  on  a  concrete  floor  while  dodging  away  from  a  fellow- 
workman  who  was  trying  to  knock  his  hat  off.  This  was  held 
not  to  come  under  the  compensation  act. 

If  the  employee  is  injured  on  his  way  to  or  from  work, 
while  on  his  employer's  premises,  it  is  considered  injury  in 
the  course  of  his  employment  and  entitles  him  to  compensation. 

An  injury  received  while  he  was  disobeying  orders  would 
not  entitle  him  to  compensation.  A  man  named  Reimers  who 
had  been  forbidden  by  his  employer  to  make  use  of  an  auto- 
mobile, took  it  out  and  was  injured  in  consequence.  He  was 
not  allowed  compensation.® 

An  injury  caused  by  a  third  person  to  an  employee  in  the 
regular  course  of  his  work  entitles  him  to  compensation  from 
his  employer  as  does  any  other  injury  in  the  course  of  the 
employment.  For  instance,  in  one  case  a  superintendent  was 
shot  by  a  man  who  had  been  annoying  a  woman  employee  and 
whom  he  had  ordered  off  the  premises.  The  superintendent 
was  entitled  to  compensation. 

§282.     Schedules  of  Compensation 

Each  act  contains  its  own  schedule  of  compensation.  Most 
of  them  follow  the  same  general  scheme.  The  following  is 
the  New  York  schedule  of  compensation  for  injuries: 

1.  Permanent  total  disability  shall  entitle  the  employee 

to  receive  two-thirds  of  his  weekly  wage,  while  he 
lives. 

2.  Temporary  total  disability  shall  entitle  the  employee 


•  Reimers  v.  Proctor  Pub.  Co.,  85  N.  J.  L.  441. 


EMPLOYER'S   RESPONSIBILITY  333 

to  receive  two-thirds  of  his  weekly  wage  to  an 
amount  not  exceeding  $3,500. 
3.  Permanent  partial  disability  entitles  the  employee  to 
receive  two-thirds  of  his  weekly  wage  for  varying 
periods  ranging  from  60  weeks  for  loss  of  thumb 
to  312  weeks  for  loss  of  an  arm. 

In  the  case  of  death,  compensation  to  the  employee's  de- 
pendent relatives  is  provided  according  to  a  fixed  schedule. 
In  New  Jersey  the  scale  runs  as  follows:  For  one  dependent 
35  per  cent  of  wages  earned  until  remarriage  of  widow  or 
attainment  of  age  of  18  by  child.  From  this  it  increases  by 
a  sliding  scale  to  a  payment  of  60  per  cent  of  wages  earned 
in  case  of  six  dependents.  In  any  case,  payments  are  not  to 
exceed  300  weeks. 

In  New  York  the  death  compensation  ranges  from  30  to 
66§  per  cent  of  wages  as  a  maximum,  and  weekly  pay- 
ments are  to  continue  until  dependency  ceases.  In  other  states 
there  are  other  variations,  but  enough  has  been  cited  to  give 
a  general  idea  of  the  liberality  of  these  laws. 

§  283.    Who  Are  Entitled  to  Compensation 

It  is  generally  held  that  in  order  to  be  an  employee  entitled 
to  compensation  the  man  must  be  regularly  employed,  and 
must  be  subject  to  the  employer's  orders  as  to  how  the  work 
shall  be  done.  Independent  contractors  and  subcontractors 
are  not  employees.  But  the  employees  of  subcontractors  may 
recover  compensation  from  the  main  contractor  as  though  they 
were  his  employees.     (See  §§  259,  260.) 

Where  there  is  a  dispute  between  the  employer  and  the 
employee  over  the  amount  of  compensation  which  is  due  under 
the  act,  most  of  these  acts  provide  for  arbitration.  Some  of 
the  acts  provide  that  at  any  time  an  employer  may  agree  with 
his  employees  to  appoint  a  standing  arbitration  committee 
which  shall  decide  all  disputes  that  may  arise  in  the  future. 


334  EMPLOYMENT 

The  law  usually  requires  the  employer  to  report  all  acci- 
dents to  the  Compensation  Commission  within  a  certain  time 
after  their  occurrence,  on  penalty  of  paying  a  severe  fine  if  he 
fails  to  comply. 

Where  one  Injury  results  from  another,  the  first  one  being 
the  result  of  the  accident,  the  compensation  must  cover  both. 
For  instance,  an  employee  was  paralyzed  in  an  accident  and 
died  of  blood-poisoning  from  a  bed-sore  which  came  because 
he  had  to  lie  in  one  position  all  the  time.  His  relatives  were 
allowed  compensation  for  his  death.'^ 

If  the  employee  was  not  strong  physically,  a  fact  which 
rendered  him  more  prone  to  accident,  it  would  make  no  dif- 
ference in  his  right  to  compensation  for  the  injury.  In  a 
Massachusetts  case,  a  delicate  woman  named  Honora  Madden, 
who  was  employed  as  a  carpet  sewer,  brought  on  angina  pec- 
toris by  pulling  heavy  carpets  across  the  table  in  the  course  of 
her  work.  It  was  admitted  that  if  she  had  been  stronger  the 
exertion  would  not  have  hurt  her.  She  was  allowed  full  com- 
pensation.* 

§  284.     Employer's  Defenses  Taken  Away  by  the  New  Act 

This  scheme  of  compensation  is  not  made  compulsory,  but 
the  same  effect  is  accomplished  by  taking  away  all  of  the 
defenses,  i.e,  assumption  of  risk  (§  2y6),  contributory  neg- 
ligence (§  2^/),  and  the  fellow-servant  rule  (§  278),  which 
the  employer  had  at  common  law.  The  result  is  that  the  em- 
ployer's chances  of  escaping  the  payment  of  heavy  damages 
in  a  suit  at  law  are  so  slight  that  most  employers  prefer  to 
take  advantage  of  the  act. 

The  employer  comes  into  the  scheme  by  taking  out  In- 
surance, or  giving  security  for  the  payment  of  claims  required 
by  the  act.     After  he  has  done  this,  it  is  assumed  that  each 


'  Burn's   Case,   218   Mass.   8. 
*  Madden's  Case,  23  Mass.  487 


EMPLOYER  S  RESPONSIBILITY  335 

of  his  employees  has  also  consented  to  come  under  the  scheme 
unless  the  employee  at  the  time  he  enters  the  employment 
files  notice  to  the  contrary  with  the  employer.  In  New  Jersey, 
every  agreement  of  employment  is  deemed  to  have  been  made 
under  the  act,  unless  at  the  time  of  making  the  contract  one 
of  the  parties  notifies  the  other  in  writing  that  he  refuses  to 
accept  tlie  agreement  under  the  terms  of  the  act. 

Employees  Cannot  Give  Up  Right.  The  acts  also  provide 
that  the  employee  cannot  make  an  agreement  giving  up  his 
right  to  compensation.  If  he  makes  one,  it  will  have  no  bind- 
ing effect  on  him,  and  he  may  claim  the  compensation  just 
the  same. 

Notes: 

1.  Every  employer  of  labor  should  Inform  himself  as 

to  his  responsibility  under  the  laws  of  his  state. 

2.  It  is  cheaper  for  the  employer  to  enter  the  compen- 

sation scheme  than  to  take  the  alternative.  Where 
the  acts  allow  it,  most  employers  will  find  it 
cheaper  to  insure  with  the  State  Fund  or  some 
good  insurance  company  than  to  risk  paying  for 
injuries. 

3.  An  employer  should  select  reputable  physicians  and 

notify  his  employees  to  go  to  them,  when  the  act 
makes  him  responsible  for  medical  attendance. 
This  will  protect  both  himself  and  his  employees 
against  overcharge  or  malpractice. 

§  285.     Third  Persons 

Except  under  the  workmen's  compensation  acts,  the  em- 
ployer is  not  responsible  to  his  employees  for  the  acts  of  third 
persons  over  whom  he  had  no  control.  If  a  train  robber  were 
to  hold  up  a  train  and  shoot  the  engineer,  the  railroad  com- 
pany would  not  be  responsible  for  the  affair  to  either  em- 
ployees who  were  hurt  or  passengers  who  were  robbed. 


S3^  EMPLOYMENt 

The  employer  is,  on  the  other  hand,  responsible  to  third 
persons  for  any  injuries  caused  to  them  by  his  employees  in 
performing  their  duties.  If  the  injury  is  the  result  of  some 
act  of  the  employee  which  has  no  connection  with  his  duties 
as  an  employee,  the  employer  is  not  liable.  If,  for  example, 
the  employee  should  injure  the  third  person  in  a  fight  over 
some  personal  quarrel,  or  in  playing  a  practical  joke,  the  em- 
ployer could  not  be  held  to  have  had  any  connection  with  the 
matter.     (See  §  136.) 

Where  an  employer  is  liable  to  a  third  person  for  injuries 
caused  by  his  employees,  if  the  third  person  was  careless  in 
any  way  that  contributed  to  the  accident,  he  would  be  pre- 
vented from  recovering  damages  from  the  employer.  The 
contributory  negligence  rule  (§  277)  still  stands  in  all  cases 
so  far  as  third  persons  are  concerned. 


Review  Questions 

1.  What  three  common  law  rules  relieved  the  employee  of  respon- 

sibility for  accidents?     Explain  the  working  of  each. 

2.  What  two  classes  of  modern  law  modify  the  injustice  of  the 

common  law  rules  as  to  accidents  to  workers  ?     What  is  the 
theory  of  these  modern  laws? 

3.  What  are  the  special   features  of  the  workmen's  compensation 

act  of  your  own  state? 

4.  What  are  the  special  features  of  the  employers'  liability  act  of 

your  own  state? 

5.  Who  are  employees?    Who  are  entitled  to  damages  or  compensa- 

tion for  an  injury?     What  must  the  injured  workman  prove 
to  secure  damages  for  a  personal  injury  in  your  state? 

6.  What   should  a  workman,   injured  while   employed  by  one  not 

insured  under  workmen's  compensation  act,  do  in  your  state? 

7.  When  is  an  employer  responsible  to  third  persons  for  injuries 

caused  by  his  employees? 

8.  If  a  woman  offers  her  neighbor's  cook  higher  wages  so  that  she 

leaves,  is  she  liable  to  her  neighbor  in  damages? 


PART  VIII 
PARTNERSHIP 


CHAPTER  XLIII 
INTRODUCTORY 

§  286.     Definition 

Partnership  is  the  result  of  a  contract  between  two  or 
more  competent  parties  to  combine  their  money,  property, 
skill,  or  labor  for  the  transaction  of  some  lawful  business  for 
profit. 

Essential  Elements.  Mere  representation  that  parties  are 
partners,  or  their  passive  acquiescence  in  such  representations 
by  others,  will,  as  to  third  parties,  be  sufficient  to  establish 
partnership  liabilities.  To  form  a  partnership  as  between  the 
parties  themselves  is  less  simple  and  requires  the  following 
essential  elements: 

1.  An  agreement 

2.  Parties  competent  to  contract 

3.  Partnership  capital  or  property 

4.  A  community  of  control 

5.  A  lawful  business 

6.  Profit-sharing  as  a  motive 

Unless  expressly  stipulated  otherwise,  as  in  the  case  of 
dormant  and  special  partners,  each  member  of  a  partnership 
has  an  equal  right  to  assist  in  the  management  of  the  partner- 
ship business  and  property,  and  has  equal  power  to  contract 
regarding  it.  This  right  may  be  restricted  by  agreement 
among  the  partners. 

The  business  or  undertaking  must  be  lawful,  and  the 
association  must  have  been  formed  for  the  purpose  of  sharing 
profits.  An  association  that  does  not  share  profits  is  not  a 
partnership. 

339 


340  PARTNERSHIP 

Distinctive  Features.  The  partnership  relation  is  char- 
acterized by  certain  distinctive  features. 

1.  Each  partner  is  an  agent  for  the  others  in  the  trans- 

action of  any  business  within  the  scope  of  the  part- 
nership purposes. 

2.  Each  partner  shares,  either  equally  or  in  an  agreed 

proportion,  in  the  net  profits  of  the  business  and 
usually  in  the  losses  also. 

3.  In  case  of  insolvency  each  partner  is  personally  liable 

for  all  of  the  firm's  obligations. 

4.  The  property,  the  business,  firm  name,  good-will,  and 

any  trade-marks  or  other  intangible  possessions  are 
firm  property  and  form  part  of  the  common  fund. 

5.  A  partner  is  entitled  to  good  faith  and  fair  dealing 

from  his  associates,  and  on  dissolution  of  the  part- 
nership may  have  an  accounting  to  ascertain  his 
interests  in  the  business. 

6.  The  partnership  relation  is  a  purely  personal  one  and 

the  partnership  is  terminated  if  any  one  of  the 
partners  dies,  retires,  or  sells  his  interest  in  the  firm. 

7.  Unlike  a  corporation,  the  partnership  has  no  entity 

distinct  from  its  membership.  It  cannot  sue  nor  be 
sued  in  the  firm  name.  It  cannot  contract  with  nor 
bring  suit  against  its  members,  nor  can  they  bring 
suit  against  it. 

§  287.     Partnerships     Distinguished     from     Non-Partnership 
Organizations 

Co-ownership  in  either  land  or  personal  property  does  not 
involve  any  partnership  between  the  owners. 

Associations  not  formed  for  profit  are  not  partnerships.  The 
many  unincorporated  clubs,  churches,  societies,  associations, 
and  fraternal  organizations  are  not  partnerships  and  do  not 


INTRODUCTORY  341 

involve  mutual  agency  nor  partnership  liability.  Co-operative 
societies  which  buy  goods  and  distribute  them  among  their 
members  are  not  partnerships  unless  formed  for  the  purpose 
of  making  a  profit.  In  some  states  business  organizations 
designated  as  partnership  associations  are  authorized  by  law. 
These  are  neither  partnerships  nor  corporations,  though  they 
partake  of  the  characteristics  of  both.     (See  §  293.) 

Contracts  That  Are  Not  Partnership  Contracts.  Contracts 
are  frequently  made  for  a  share  of  profits  as  compensation 
for  services,  for  the  use  of  property,  or  for  the  loan  of  money. 
In  the  first  two  cases,  if  the  agreement  was  made  in  good  faith 
and  not  to  evade  the  law,  the  contract  will  not  be  held  to  create 
a  partnership.  Where  money  is  loaned,  and  an  agreement  is 
made  in  good  faith  to  give  the  lender  a  share  In  the  profits  as 
compensation  for  its  use,  and  he  does  not  participate  in  the 
management  of  the  business  or  hold  himself  out  as  a  partner, 
the  contract  will  not  in  most  states  be  considered  one  of  part- 
nership. It  is  safer  to  have  the  agreement  expressed  in  writ- 
ing, as  under  the  old  rule  of  law  the  parties  became  partners 
under  such  an  arrangement,  and  in  some  states  it  is  necessary 
to  have  a  written  agreement  to  prevent  this  effect. 

A  contract  of  the  above  nature  should  provide  for  the  re- 
turn of  the  money  loaned  without  reference  to  profits.  Where 
such  a  contract  concerns  the  use  of  property,  the  title  to  the 
property  should  be  carefully  reserved  to  the  owner.  In  all 
cases  where  profits  are  taken  without  partnership  intent,  It  is 
prudent  to  specify  in  the  contract  that  the  party  shall  receive 
as  compensation  "an  amount  equal  to"  the  proposed  share  of 
profits. 

If  in  any  of  the  cases  of  profit-sharing  discussed,  the  agree- 
ment is  made  for  a  share  of  the  "gross  returns,"  this  wording 
shows  conclusively  that  the  arrangement  is  not  a  partnership. 
The  usual  arrangement  for  renting  land  for  a  share  of  the 
crops  raised  is  an  example  of  this   form  of  contract,   and 


342  PARTNERSHIP 

neither  as  between  the  parties  themselves  nor  as  to  third  per- 
sons would  the  relation  be  one  of  partnership. 

Liability  to  Third  Parties.  In  dealing  with  this  question 
it  is  to  be  emphasized  that  as  to  third  parties  it  is  the  apparent 
intention  of  the  parties  rather  than  their  expressed  or  declared 
intention  which  controls.  If  the  acts  of  the  persons  under  con- 
sideration are  such  as  to  mislead  third  persons  into  believing 
them  partners,  they  will  have  to  assume  the  liabilities  of  part- 
ners to  such  third  parties.  As  between  the  parties  to  the 
agreement,  however,  the  true  rule  is  that  "the  agreement  and 
intention  of  the  parties  themselves  should  govern  in  all  cases." 
(See  §§  295,  299.) 

Notes.- 

1.  A  contract  for  a  share  in  the  profits  not  intended  to 

create  a  partnership  should  always  be  in  writing 
and  provide  either  for  "an  amount  equal  to"  the 
agreed  share  of  the  profits,  or  for  a  share  of  the 
"gross  returns,"  and  not  for  "a  share  in  the 
profits." 

2.  Such  a  contract  should  also  provide  that  the  person 

with  whom  the  profits  are  to  be  shared  is  not  to  be 
a  partner,  and  is  to  have  no  control  of  the  business 
nor  liability  for  its  debt. 


Review  Questions 

1.  What  is  a  partnership?     What  are  the  essential  elements? 

2.  What  may  cause  a  person  to  be  held  liable  as  a  partner  by  third 

parties? 

3.  How  is  a  partner  an  agent? 

4.  Must  each  partner  have  an  interest  in  both  profits  and  losses? 

5.  What  is  meant  by  partnership  liability  ? 

6.  Distinguish  between  the  legal  character  of  a  partnership  and  a 

corporation. 


INTRODUCTORY  343 

Distinguish  between  partners  in  general  business  and  partners 

in  common  of  a  tract  of  land. 
How  may  clubs,  associations  and  the  like  be  distinguished  from 

partnerships  ? 
Can  a  person  have  a  share  of  profits  as  compensation  for  services 

or  use  of  property  without  becoming  liable  as  a  partner? 

10.  Why  does  a  different  legal  effect  attach  to  a  share  of  "gross 

returns"  and  a  share  of  "net  profits"? 

11.  What  determines  the  liability  to  third  parties? 

12.  If  a  man  is  interested  in  the  profits  of  a  business,  is  he  neces- 

sarily a  partner  therein  ?    Explain  answer. 

13.  A  and  B  were  partners.     C  was  a  salesman  for  the  firm,  and 

for  his  services  he  was  paid  one-tenth  of  the  net  profits  of 
the  firm.  The  firm  owed  D  $1,000  on  an  open  account,  and 
D  sued  A,  B,  and  C  as  partners.  Is  C  liable  as  a  partner 
or  not?     Why? 

14.  The  president  of  a  non-incorporated  club  buys  some  furniture 

for  the  club.  Will  the  members  be  liable  for  the  cost  of  the 
furniture?     Why?     Will  any  of  the  members  be  liable? 

15.  A  v/as  a  horse-trainer  and  B  the  owner  of  a  race-horse.    They 

made  an  agreement  whereby  A  was  to  keep,  train,  and  control 
the  horse,  and  both  A  and  B  were  to  divide  the  expenses  and 
the  winnings.     Was  this  a  partnership  arrangement? 

16.  A  makes  a  loan  to  the  firm  of  X,  Y  &  Co.,  who  agree  to  pay 

him  a  certain  percentage  of  the  profits.  Does  this  arrange- 
ment constitute  A  a  partner  of  the  firm? 

17.  A  and   B   make  an   agreement  whereby  A   agrees  to   run   B's 

factory  and  B  agrees  to  pay  A  a  certain  percentage  of  the 
profits.    Is  this  a  partnership  arrangement? 

18.  B  and  L  make  an  agreement  whereby  B  furnishes  a  farm,  team. 

and  some  labor,  and  L  furnishes  the  greater  part  of  the  labor 
and  agrees  to  manage  the  farm.  The  profits  are  to  be  divided 
as  follows:  two-thirds  to  B  and  one-third  to  L.  Is  this  a 
partnership  agreement  ? 


CHAPTER  XLIV 

THE  CONTRACT  OF  PARTNERSHIP 

§  288.     Parties 

As  partnership  is  strictly  a  contract  relation,  it  is  essential 
that  the  parties  to  it  be  competent  to  contract.  (See  under 
§  38.) 

If  a  minor  becomes  a  partner,  his  acts  will  bind  the  firm, 
since  a  minor  may  act  as  agent.  Should  the  firm  become  in- 
solvent, however,  the  minor  may  take  advantage  of  his  in- 
fancy, refuse  the  partnership  liability,  and  leave  his  associates 
to  bear  the  entire  burden  of  the  partnership  obligations,  in- 
cluding those  which  he  himself  created,  but  he  cannot  with- 
draw any  capital  he  may  have  invested  in  the  firm. 

A  partnership  may  be  entered  into  between  two  firms  al- 
ready existing,  or  between  a  firm  and  an  individual,  as  readily 
as  may  any  other  contract.  Under  such  an  arrangement  the 
profits,  and  in  case  of  dissolution  the  assets,  are  divided  among 
the  component  firms  or  parties,  and  then  subdivided  by  the 
firms  among  their  individual  members.  The  individual  mem- 
bers of  both  firms  are  personally  liable  to  third  parties. 

A  corporation  cannot  become  a  partner  unless  expressly 
authorized  to  do  so  by  its  charter.  It  may,  however,  make 
itself  liable  to  third  persons  as  a  partner  if  it  attempts  to  enter 
into  partnership  relations. 

Note: 

I.     Any  person  who  is  capable  of  contracting  may  be- 
come a  partner.     Corporations,  before  they  may 


•  For  forms  of  partnership  contract,  see  Chapter  CV,  Forms  50,  52. 

344 


THE  CONTRACT  OF   PARTNERSHIP  345 

become  partners,  must  be  expressly  authorized  by 
their  charters  to  do  so. 

§  289.     Kinds  of  Partners 

Partners  are  of  various  kinds.  There  may  be  general, 
limited,  dormant,  and  nominal  partners. 

General  Partners.  A  general  or  active  partner  is  one  who 
takes  part  in  the  management  of  the  business,  and  who  is 
liable  for  the  firm's  obligations  without  limitation  as  to 
amount.  An  active  partner  who  wishes  to  withdraw  from  the 
firm  and  cut  off  subsequent  liability,  must  give  notice  to  all 
those  with  whom  the  firm  is  doing  business. 

Limited  Partners.  A  limited  or  special  partner  is  one  who 
does  not  participate  to  the  full  in  partnership  liability.  As 
the  price  of  his  limited  liability,  such  a  partner  must  refrain 
from  taking  any  part  in  the  management.  Limited  partner- 
ships are  formed  only  where  authorized  by  special  statutes. 
(See  §  293.) 

Dormant  Partners.  A  dormant  or  sleeping  partner  is  one 
who  has  invested  as  a  partner  but  whose  connection  with  the 
firm  is  secret  and  who  has  no  part  in  the  management  of  the 
business.  A  dormant  partner  has  no  exemptions  or  privileges 
beyond  those  of  a  general  partner,  except  as  a  result  of  the 
secrecy.  If  this  connection  with  the  firm  is  discovered  he  is 
liable  in  exactly  the  same  way  and  to  the  same  extent  as  any 
general  or  active  partner.  Unless  prevented  by  the  partner- 
ship agreement,  he  may  at  any  time  assert  himself  as  an  active 
partner  and  take  part  in  managing  the  firm  business. 

A  dormant  partner  who  withdraws  without  giving  notice 
cannot  be  held  to  any  subsequent  liability  of  the  firm,  even 
though  his  previous  connection  with  it  should  become  known. 
His  withdrawal,  however,  does  not  free  him  from  liability  for 
anything  done  by  the  firm  during  his  connection  with  it. 

Silent  Partners.     The  term  "silent  partner"  is  often  used 


346  PARTNERSHIP 

with  much  the  same  meaning  as  "dormant  partner."  There  is, 
however,  this  difference:  a  dormant  partner  must  be  both 
"secret"  and  "silent,"  while  a  silent  partner  need  not  be  secret. 
A  silent  partner  has  no  voice  in  the  management  of  the  firm 
business,  but  may  be  publicly  known  as  a  partner.  He  is  liable 
for  firm  obligations  just  as  is  any  other  partner,  and  if  he  with- 
draws, he  must  give  notice  to  escape  subsequent  liability. 

Nominal  Partners.  A  nominal  partner  is  one  who,  while 
not  really  a  partner,  in  that  he  has  no  interest  in  the  business 
or  profits,  allows  his  name  to  be  used  or  to  appear  as  that  of  a 
partner.  He  is  held  liable  to  those  who  give  credit  to  the  firm 
on  the  faith  or  with  knowledge  of  his  being  a  member.  He  is 
not,  however,  liable  to  a  creditor  who  had  no  knowledge  of  his 
being  held  out  as  a  partner  when  the  credit  was  given. 

Suhpartners.  A  partner  may  agree  with  an  outside  party 
to  share  his  interest  in  the  profits  and  property  of  the  firm. 
Such  an  arrangement  is  termed  a  subpartnership.  It  may  be 
entered  into  without  the  consent  of  the  firm,  and  without 
afifecting  in  any  way  its  existence  or  operations.  The  sub- 
partner  is  not  a  member  of  the  original  firm,  is  not  liable  to 
its  creditors,  and,  under  ordinary  circumstances,  has  no  right 
of  accounting  against  it. 

Notes: 

1.  Limited  partners  should  always  take  care  to  see  that 

the  proper  notices  and  other  regulations  required 
by  the  law  of  their  state  have  been  given  and 
complied  with. 

2.  A  retiring  partner  should  take  care  to  see  that  all 

those  with  whom  the  firm  has  had  dealings  are 
notified  of  his  ceasing  to  be  a  member  of  the  firm. 

3.  A  nominal  partner  is  liable  only  if, he  permitted  his 

name  to  be  used.  One  cannot  be  made  a  nominal 
partner  against  one's  will. 


THE  CONTRACT  OF  PARTNERSHIP  347 

§  290.     Partnership  Contracts 

The  customary  and  the  only  proper  method  of  forming  a 
partnership  is  by  written  articles  of  partnership  signed  by  all 
the  parties.  These  articles  may  be  a  very  simple  memorandum 
of  agreement,  or  they  may  be  expanded  into  elaborate  articles 
of  association,  providing  for  the  numerous  details  and  possible 
exigencies  of  an  extended  commercial  enterprise. 

In  spite  of  the  dangers  of  such  a  course,  partnerships  are 
frequently  formed  by  oral  agreement.  Under  the  Statute  of 
Frauds,  an  oral  contract  of  partnership  to  last  more  than  a 
year  is  not  valid.  If,  however,  immediately  upon  making 
such  a  contract,  the  parties  thereto  enter  upon  its  performance, 
a  partnership  at  will  is  thereby  formed,  which  is  legal  and  is 
governed  as  to  its  terms  by  the  contract,  but  which  may  be 
terminated  at  any  time  by  either  party,  regardless  of  the  terms 
of  the  contract. 

It  must  be  borne  in  mind  that  the  Statute  of  Frauds  does 
not  apply  to  oral  contracts  that  may  be  performed  within  a 
year.  Such  contracts  are  binding  for  the  specified  length  of 
time,  and  cannot  be  dissolved  at  will  without  incurring  a 
liability  for  damages. 

In  many  cases  of  partnership  there  is  neither  a  written  nor 
a  verbal  contract  which  can  be  proved,  but  the  parties  con- 
cerned, either  intentionally  or  unintentionally,  have  acted  as 
partners,  have  had  a  common  fund  in  which  they  exercised  a 
community  of  interest,  and  have  shared  profits  and  losses. 
Under  such  circumstances  they  will  be  held  to  be  partners, 
both  as  between  themselves  and  as  to  third  persons. 

This  same  principle  applies  to  the  case  of  parties  who  as- 
sume to  be  Incorporated  when  they  are  not.  It  does  not  apply 
to  those  who  have  attempted  to  incorporate  legally,  but  have 
failed  in  some  point  of  procedure;  they  would  be  held  to  be 
a  de  facto  corporation  and  as  such  capable  of  doing  business. 

Laws  Regulating  Formation  of  Partnerships.     Most  part- 


348  PARTNERSHIP 

nerships  are  formed  under  common  law  rules  that  are  the  same 
in  every  part  of  the  Union.  In  certain  of  the  western  states, 
however,  codes  of  partnership  law,  intended  to  regulate  gen- 
eral partnerships,  have  been  enacted.  Entirely  apart  from 
these  general  partnership  codes,  nearly  all  the  states  have 
provided  for  the  organization  of  partnerships  with  special  or 
limited  partners.  The  Uniform  Partnership  Act,  prepared  and 
recommended  by  the  National  Conference  of  Commissioners 
on  Uniform  State  Laws,  has  been  adopted  in  Maryland,  Penn- 
sylvania, Wisconsin,  Illinois,  Michigan,  Wyoming  and  Ten- 
nessee. 

Notes: 

1.  The  contract  of  partnership  should  always  be  in 

writing. 

2.  The  state  partnership  law  should  always  be  consulted 

in  the  formation  of  any  partnership,  and  especially 
in  the  case  of  a  limited  partnership. 

§  291.     The  Firm  Name 

The  usual  practice  where  there  are  two  partners  is  to  use 
both  names ;  the  name  of  the  leading  partner  naturally  coming 
first.  If  there  are  more  than  two  partners,  all  the  names  may 
appear,  though  this  is  unusual  in  mercantile  partnerships. 
Usually  but  one  or  two  names  appear,  the  other  names  being 
represented  by  the  addition,  "&  Co."  Professional  partner- 
ships on  occasion  use  three  and  even  more  names  in  the  firm 
title. 

In  the  absence  of  statutory  restriction  any  title  that  is 
preferred  may  be  used  as  a  firm  name,  even  though  it  contains 
no  partner's  name,  for  instance,  such  a  name  as  "The  Ansonia 
Furniture  Company."  In  New  York  and  some  other  states  a 
firm  using  any  name  other  than  the  names  of  the  partners  or 
some  of  them,  must  register  such  "trade-name,"  together  with 


THE  CONTRACT  OF   PARTNERSHIP  349 

the  real  names  of  the  partners,  in  the  county  clerk's  office, 
under  legal  penalty.  It  is  also  illegal  in  New  York  to  use 
the  suffix  "&  Co."  unless  it  represents  existing  or  former 
partners.  Partners  may  change  the  firm  name  without  dis- 
solution or  any  special  formality,  or  may  have  more  than  one 
name  for  the  firm. 

All  business  of  the  firm  should  be  done  under  the  firm 
name,  although  a  partnership  may  exist  and  be  bound  without 
any  specific  firm  name  by  using  the  separate  names  of  the 
partners.  The  firm  signature,  as  "Herrick,  Simpson  &  Co.," 
may  be  written  by  a  partner  or  by  any  agent  of  the  firm.  If 
suit  is  to  be  brought  the  names  of  all  the  partners  must  appear 
in  the  pleadings.  The  usual  form  is  "Anselm  Cole,  Harvey 
Andrews  and  James  Ellis  Jones,  partners  under  the  firm  name 
of  Cole  &  Co." 


§  292.     Partnership  a  Personal  Relation 

It  must  be  remembered  that  partnership. is  a  personal  rela- 
tion. Such  skill  and  experience  as  one  partner  may  possess 
above  the  others  constitute  as  legitimate  a  form  of  investment 
as  any  other  kind  of  capital.  In  many  cases  these  are  taken 
as  the  full  equivalent  of  the  financial  investments  of  other 
members  of  the  firm.  In  others,  they  are  regarded  as  a  partial 
equivalent,  and  in  still  others  extra  abilities  are  recognized  by 
a  special  salary  or  a  larger  percentage  of  profits. 

As  partnership  is  a  personal  relation  and  as  one  reckless 
partner  may  bankrupt  his  associates,  the  selection  of  partners 
is  a  vital  matter.  No  one  can  be  forced  to  accept  a  partner 
he  does  not  like.  So  a  new  partner  may  not  be  admitted  except 
with  the  unanimous  consent  of  the  entire  firm. 

Because  of  the  importance  of  the  personnel,  the  death  of 
one  partner  will  ordinarily  dissolve  the  firm. 


350  PARTNERSHIP 

Note: 

I.     Partnership  is  a  personal  relation  and  a  partner 
should  always  be  a  man  who  can  be  trusted. 

§  293.     Classification  of  Partnerships 

Partnerships  may  be  roughly  divided  into  two  classes, 
general  and  special.  While  this  classification  covers  the  ma- 
jority of  cases,  there  are  a  few  forms  involving  peculiarities 
of  partnership  law,  such  as  limited  partnerships  and  joint-stock 
companies,  which  require  separate  discussion. 

A  general  partnership  is  the  usual  partnership  formed  for 
the  continued  prosecution  of  some  general  line  of  business. 
It  is  the  commonest  form  of  partnership.  General  partner- 
ships may  be  either  trading  or  non-trading. 

Trading  partnerships  include  all  those  formed  for  the  pur- 
pose of  buying,  selling,  and  manufacturing. 

Non-trading  partnerships  do  not  buy,  sell,  or  manufacture 
as  a  principal  feature  of  their  business.  These  partnerships  in- 
clude professional  partnerships,  firms  of  brokers,  etc. 

A  special  partnership  is  formed  for  the  transaction  of  some 
single  piece  of  business,  or  for  the  conduct  of  some  one  line 
of  business.  Examples  of  special  partnerships  are  as  follows : 
a  partnership  to  buy  and  sell  some  definite  piece  of  land,  to 
ship  a  cargo  to  some  particular  place,  to  buy  and  operate  a 
threshing  machine,  to  finance  and  sell  a  particular  patent,  or 
to  deal  in  specified  stocks.  A  common  form  in  the  present 
day  is  the  syndicate  organized  for  the  promotion  or  financing 
of  some  large  corporate  enterprise.  Special  partnerships  are 
often  termed  "joint  ventures."  It  is  to  be  noted  that  a  special 
partnership  means  one  undertaken  for  a  special  business,  while 
a  special  partner  simply  means  a  limited  partner. 

A  limited  partnership  may  be  formed  only  under  special 
statutes.  It  differs  from  the  ordinary  partnership  in  that  cer- 
tain of  its  partners  are  silent,  or  inactive,  and  the  liability  of 


THE  CONTRACT  OF  PARTNERSHIP        351 

these  partners  is  limited  to  the  amount  actually  invested  by 
them.  These  partners  are  called  special  partners.  If  a  partner 
whose  liability  is  thus  limited  takes  active  part  in  the  conduct 
of  the  partnership  business,  his  status  changes  and  he  at  once 
becomes  liable  as  a  general  partner. 

The  restricted  liability  enjoyed  by  the  special  partner  can 
be  secured  only  by  strict  compliance  with  the  statutory  direc- 
tions. These  usually  prescribe  notice  to  the  public  of  the 
formation  and  nature  of  the  partnership  and  require  that  a 
certificate  and  affidavit  of  the  limitations  of  the  partnership  be 
filed  in  some  office  of  public  registry.  In  New  York  a  limited 
partner  must  contribute  his  capital  in  cash.  In  all  cases  the 
local  statutes  should  be  examined-,  and  their  directions  fol- 
lowed implicitly.  In  a  New  York  case  a  limited  partner  was 
held  by  the  courts  to  be  in  fact  liable  as  a  general  partner 
merely  because  the  affidavit — stating  that  cash  had  been  paid 
by  the  limited  partner — was  filed  at  a  time  when  he  had  in 
fact  given  only  a  check  dated  a  few  days  in  advance. 

A  joint-stock  company  is  a  form  of  business  organization 
formerly  popular  but  now  practically  obsolete.  It  is  not  or- 
ganized under  any  statute,  and,  though  usually  adopting  a 
corporate  name  and  having  some  of  the  features  of  a  corpora- 
tion, is  merely  a  copartnership,  and  the  shareholders  are  re- 
sponsible for  the  debts  of  the  company  as  in  partnership. 

An  important  difference  between  such  an  organization  and 
an  ordinary  partnership  is  that  its  members  may  transfer  their 
interests  exactly  as  stockholders  do  in  a  corporation.  If  there 
are  many  members,  affairs  are  usually  managed  by  a  board  of 
trustees  or  managers,  and  the  individual  members  have  no 
authority  to  act  in  the  company  affairs. 

In  New  York  and  some  other  states  various  forms  of 
joint-stock  companies,  partnership  associations,  and  other 
ambiguous  organizations  between  partnerships  and  corpora- 
tions are  authorized  by  statute.     These  statutes  and  the  deci- 


352  PARTNERSHIP 

sions  of  the  state  courts  construing  them  must  be  consulted  to 
ascertain  their  legal  status. 


Review  Questions 

1.  What  is  the  law  as  to  a  minor's  becoming  a  partner? 

2.  What  is  a  general  partner?     A  limited  partner?     A  dormant 

partner?    A  nominal  partner?    A  subpartner? 

3.  What  is  a  limited  partnership?    What  does  your  own  state  law 

prescribe  for  the  formation  of  a  limited  partnership? 

4.  What  is  a  partnership  at  will? 

5.  In  the  event  that  the  name  of  a  partnership  does  not  clearly 

indicate  who  all  the  principals  of  the  firm  are,  what  is  neces- 
sary for  such  a  firm  to  do  in  order  to  bring  suit? 

6.  Why  should  a   partnership   agreement  be   written?     How   can 

parties  drift  into  a  partnership? 

7.  What  is  a  special  partner?    What  is  a  special  partnership? 

8.  What  are  the  peculiarities  of  a  joint-stock  company? 

9.  What  matters  should  be  specified  in  articles  of  copartnership? 
ID.     Prepare  a  short  form  of  partnership  agreement  for  equal  part- 
ners. 

11.  Prepare   a   copartnership   agreement   that   shall   provide   for   a 

period  of  five  years  notwithstanding  the  death  of  one  of  the 
partners  in  the  meantime,  and  provide  also  for  payment  of 
interest  on  investments,  salaries  to  partners,  and  a  method  of 
determining  and  apportioning  profits  and  losses. 

12.  A  buys  the  share  of  M  in  a  partnership  composed  of  M,  N,  and 

O.  Does  that  make  him  a  member  of  the  firm?  Explain 
answer. 

13.  B  withdraws  by  agreement  from  a  firm  of  which  he  has  been  a 

member,  but  no  announcement  is  made  and  he  allows  his  name 
to  be  used  on  the  letterhead.  The  firm  becomes  insolvent. 
What  is  B's  position? 


CHAPTER  XLV 

PARTNERSHIP  PROPERTY 

§  294.     Nature  of  Partnership  Property 

The  partnership  investment  is  the  money  or  property, 
tangible  or  intangible,  contributed  by  the  partners  for  the 
purposes  of  the  business.  The  original  property  of  a  partner- 
ship is  derived  from  the  contributions  of  the  partners.  When 
profits  are  made,  they  may  be  drawn  out,  or  they  may  be 
allowed  to  accumulate  and  meanwhile  may  be  used  in  the 
prosecution  of  the  firm's  business.  If  retained  in  the  business 
they  are  practically  merged  in  the  original  capital,  the  two 
together  constituting  the  partnership  property. 

Any  property  purchased  with  partnership  funds  becomes 
prima  facie  partnership  property.  If  such  property  is  taken  in 
the  name  of  a  single  partner,  he  holds  as  trustee  for  the  firm. 
The  firm  name,  the  good-will  of  the  business,  and  any  trade- 
marks used  in  the  business  are  the  property  of  the  partnership, 
in  which  each  partner  has  his  interest. 

When  the  business  is  sold,  the  firm  name  passes  with  it. 
If  the  business  is  sold  as  a  whole,  the  good-will  passes  with 
the  firm  name  and  the  tangible  assets. 

A  firm  as  such  cannot  hold  real  estate.  Hence,  land  must 
be  deeded  to  the  members  of  a  firm  to  hold  as  tenants  in 
common,  or  to  some  individual,  who  is  usually  a  member  of 
the  firm,  to  hold  as  trustee  for  its  benefit.  A  conveyance  of 
real  estate  to  a  firm  by  name,  in  cases  where  the  firm  name 
contains  the  name  or  names  of  existing  members,  passes  a 
legal  title  to  the  members  named,  who  will  hold  in  trust  for 

353 


354  PARTNERSHIP 

the  whole  firm.  If  no  member  is  named  in  the  firm  title,  no 
title  passes  to  anyone,  but  the  seller  can  later  be  compelled  to 
deed  to  the  individual  members  of  the  firm. 

Real  estate  held  for  the  benefit  of  the  firm  is,  for  all  part- 
nership purposes,  treated  as  personal  property.  The  money 
or  property  invested  in  a  partnership  and  any  property  ac- 
quired by  the  firm  is  partnership  property.  Each  partner  may 
deal  with  it  in  the  firm  business  as  an  agent  of  the  firm,  but 
he  has  no  personal  right  to  any  of  it. 

A  partner  has  no  claim  to  interest  on  his  investment,  nor 
even  to  interest  on  money  put  in,  over  and  above  his  agreed 
investment,  unless  it  has  been  expressly  so  agreed.  It  is  always 
possible  for  a  partner  to  advance  money  or  to  let  the  firm 
have  the  use  of  property  of  which  he  retains  the  right  to 
possession,  and  such  money  or  property  remains  his  individual 
property.  Money  or  property,  however,  put  into  a  partnership 
as  an  investment  becomes  the  actual  property  of  the  partner- 
ship. 

Power  Over  Personal  Property  of  Firm.  Each  partner's 
power  over  the  property  of  the  firm  is  the  same.  Each  is 
agent  for  all  the  others  in  everything  that  pertains  to  the  care, 
sale,  and  management  of  the  partnership  property. 

A  partner  has  full  power  to  buy  and  sell  personal  property 
within  the  scope  of  the  partnership  business,  and  the  firm  is 
bound  by  his  transactions.  This  power  does  not  extend  to  the 
sale  of  property  used  by  the  firm  for  carrying  on  the  firm 
business,  as  such  a  sale  would  tend  to  destroy  the  partnership 
business.  Where  a  sale  is  to  be  made  of  the  stock  in  trade, 
or  of  the  entire  assets,  or  of  fixtures  or  furniture,  all  of  the 
firm  should  join  in  the  assignment. 

Pozver  as  to  Real  Estate.  One  partner  cannot  make  a  valid 
deed  to  real  estate  held  by  the  firm,  but  he  can,  when  such 
contract  is  within  the  scope  of  the  partnership  business,  make 
a  contract  to  convey,  which  the  courts  will  compel  the  firm  to 


PARTNERSHIP  PROPERTY  355 

perform.  Likewise,  in  a  similar  case,  a  partner  can  make  a 
valid  contract  for  the  purchase  of  land  by  the  firm. 

A  partnership  may  be  formed  by  either  written  or  verbal 
contract  for  the  express  purpose  of  buying  and  selling  real 
estate.  In  such  cases  the  realty  is  treated  for  all  partnership 
purposes  as  if  it  were  personalty. 

For  a  legitimate  purpose  a  partner  has  also  the  right  to 
pledge  or  mortgage  the  real  property  of  the  firm.  He  has, 
however,  no  power  to  sell  property  of  the  firm  or  to  borrow 
money  upon  it  for  his  own  purposes  or  to  pay  his  own  debts, 
and  anyone  lending  him  money,  or  buying  property  from  him 
imder  such  circumstances,  with  knowledge,  takes  no  title  to 
the  property  in  question. 

The  wife  of  a  partner  has  no  right  to  dower  in  real  estate 
held  for  the  purposes  of  the  firm  until  all  the  claims  of  credit- 
ors and  of  all  the  other  partners  have  been  satisfied.  In  a 
solvent  firm,  however,  the  wives  of  the  partners  would  be 
entitled  to  dower,  and  when  such  property  is  sold  the  wives 
should  release  their  dower  rights. 

Notes: 

1.  A  partner  has  a  right  to  make  use  of  firm  property 

for  the  purposes  of  the  business  in  common  with 
all  the  other  partners. 

2.  He  has  no  right  to  firm  property  personally  until  the 

firm  has  been  wound  up  and  the  assets  divided, 
unless  he  has  loaned  property  with  the  express 
provision  that  it  is  to  remain  his  individually. 

§  295.    Liability  of  Partnership  Property  for  Debts 

A  partner's  interest  can  be  reached  by  attachment  or  by 
execution.  This  interest,  however,  is  merely  a  right  to  a  cer- 
tain proportion  of  the  surplus  after  debts  are  paid  and  the 
affairs  of  the  partnership  are  adjusted,  and  this  is  all  that  can 


356  PARTNERSHIP 

be  reached  by  legal  process.  The  effect  of  the  sale  of  a 
partner's  interest  under  execution  would  be  to  give  the  pur- 
chaser the  right  to  merely  the  same  interest  in  value  that  the 
debtor  partner  had.  Such  a  sale  would  make  necessary  the 
dissolution  of  the  partnership,  and  the  Immediate  settlement 
of  its  affairs,  for  all  partnership  debts  must  be  settled  before 
anything  is  set  aside  for  a  purchaser  under  execution. 

Execution  following  judgment  on  a  claim  against  the  firm 
runs  in  the  names  of  the  individual  partners,  and  can  be  levied 
on  the  partnership  property,  or  on  the  individual  property  of 
any  of  the  partners.  If  it  is  levied  on  individual  property,  the 
partner  to  whom  such  property  belongs  has  recourse  against 
the  other  partners  for  their  proportions  of  the  debt. 

In  event  of  insolvency  the  partnership  assets  should  be 
applied  to  the  payment  of  the  partnership  debts,  and  the 
separate  assets  to  the  payment  of  the  individual  debts,  and  any 
surplus  from  either  class  should  be  carried  over  to  the  payment 
of  the  other  class.  This  process  is  called  "marshaling  the 
assets." 

On  execution  against  the  partnership  there  can  be  no  claim 
for  homestead  or  exemption  out  of  the  joint  assets.  This  is 
the  general  law,  but  it  does  not  apply  to  New  York  and  a  few 
other  states,  in  which  the  provisions  of  the  exemption  law 
extend  to  property  owned  by  a  partnership  of  which  the  debtor 
was  a  member.     (See  §  300.) 

Assignment  for  Benefit  of  Creditors.  An  assignment  for 
the  benefit  of  creditors  can  be  made  only  by  all  the  partners 
acting  together.  If,  however,  one  partner  makes  such  an 
assignment,  the  others  may,  if  they  choose,  ratify  his  action, 
thus  making  the  unauthorized  assignment  valid.  In  case  a 
partner  has  absconded,  or  cannot  be  reached,  the  remaining 
members  of  the  firm,  acting  together,  may  make  a  valid  assign- 
ment. 

It  has,  however,  been  held  in  New  York  that  one  partner 


PARTNERSHIP  PROPERTY  357 

may  transfer  the  partnership  effects  directly  to  a  creditor  of 
the  firm,  without  the  knowledge  or  consent  of  his  associates, 
and  that  the  courts  will  sustain  his  action. 

Under  the  National  Bankruptcy  Law,  however,  in  any  case 
where  an  assignment  is  made  when  the  firm  is  insolvent,  any 
aggrieved  creditor  may  proceed  under  the  Bankruptcy  Act. 

For  the  liability  of  individual  partners  to  third  persons, 
see  §§  287,  300. 

Note: 

I.  If  an  assignment  of  partnership  property  has  been 
made,  any  creditor  can  institute  bankruptcy  pro- 
ceedings. 

§  296.     Profits 

The  sharing  of  profits  is  an  essential  feature  and  the  usual 
object  of  a  partnership.  Ordinarily  tliese  profits  are  ascer- 
tained by  deducting  the  current  expenses  from  the  current  re- 
ceipts, or  gross  profits,  or,  on  dissolution  or  any  general 
accounting,  by  deducting  the  firm  indebtedness  and  the  original 
partnership  investment  from  the  total  partnership  assets.  As 
there  is  often  room  for  differences  of  opinion  as  to  what  con- 
stitutes profits,  it  is  well  to  define  in  the  articles  of  association 
how  they  are  to  be  determined. 

In  the  absence  of  a  special  agreement  otherwise,  the  com- 
mon law  rule  governs  the  division  of  both  profits  and  losses. 
Under  this  the  partners  must  share  equally,  without  any  varia- 
tion, or  any  allowance  for  the  greater  value  of  services 
rendered,  the  greater  amount  of  time  devoted,  or  the  greater 
investment  made  by  one  or  the  other  of  the  partners.  This 
is  usually  arranged  by  agreement,  however,  so  that  partners 
who  devote  more  time  or  money  to  the  business,  receive  a 
more  nearly  commensurate  return.  Salaries  for  services  and 
interest  on  investments  are  sometimes  provided  for  in  the  part- 
nership agreement. 


3S8  PARTNERSHIP 

The  rule  of  good  faith  requires  that  all  profits  made  within 
the  scope  of  the  partnership  business  shall  be  turned  in  for  the 
benefit  of  the  entire  firm.  If  any  partner  violates  this  rule  and 
uses  his  position  in  the  firm  and  the  knowledge  he  has  of  the 
business  to  secure  any  secret  rebates,  commissions,  or  other 
profits  for  himself,  he  will,  if  discovered,  be  held  liable  to  the 
firm  for  the  amount  so  realized. 

If  a  partner  uses  firm  funds  in  his  private  speculations  he 
can  be  compelled  to  account  for  any  profits.  If  the  result  is  a 
loss,  he  must  bear  this  himself,  returning  the  partnership  funds 
intact.  This  rule  also  applies  to  the  use  for  private  gain  of 
time  or  skill  which  should  be  applied  to  the  firm  business. 

Right  to  an  Accounting.  Every  partner  is  entitled  to  have 
accurate  accounts  kept.  The  right  exists  whether  or  not  any 
reference  has  been  made  to  it  in  the  terms  of  agreement  This 
makes  it  the  duty  of  each  partner  to  keep  an  accurate  record 
of  his  own  transactions  concerning  the  firm  business.  If,  as  is 
usually  the  case,  some  one  partner  or  some  particular  employee 
is  designated  to  keep  the  firm's  books,  it  is  the  duty  of  each 
partner  to  furnish  such  accountant  full  information  as  to  his 
transactions. 

It  is  also  the  right  of  every  partner  to  have  access  to  the 
firm's  books  and  accounts  and  to  make  extracts  therefrom. 

In  closing  the  books  to  ascertain  amounts  due  partners  the 
partners  are  bound  by  a  bookkeeper's  statement  either  by 
mutual  signature  thereto,  or  by  failure  to  object  within  a 
reasonable  time  after  submission  to  them  of  the  statement, 
or  by  any  action  which  would  imply  acceptance. 

Notes: 

1.  Any  proposed  extra  share  of  profits  to  any  partner 

should  be  specified  in  the  partnership  agreement. 

2.  The  books  of  account  should  always  be  kept  at  the 

office  of  the  firm,  or,  if  it  has  more  than  one,  at 
the  principal  office. 


PARTNERSHIP   PROPERTY  359 

3.  Partners  should  make  every  effort  to  keep  their 
accounts  straight,  for,  if  the  accounts  have  been 
garbled  or  falsified  or  the  books  mutilated,  every 
presumption  will  be  allowed  against  the  partner 
who  is  at  fault. 


Review  Questions 

1.  What  is  the  capital  of  a  partnership? 

2.  What  does  the  partnership  property  include? 

3.  May  a  firm  pass  title  to  personal  property  of  the  partnership  by 

bill  of  sale  in  the  business  name  of  the  firm? 

4.  May  a  member  of  a  firm  sell  out  the  entire  assets? 

5.  Can  a  partner  sell  firm  real  estate? 

6.  May  a  good  title  to  firm  realty  be  passed  without  the  wives  of 

the  partners  joining  in  the  deed? 

7.  A  and  B  are  partners.     C  recovers  a  judgment  against  A  for 

a  personal  debt,  but  can  find  no  personal  property  on  which 
to  levy.  What  can  C  do?  What  effect  has  the  bankruptcy 
of  one  of  the  partners  upon  the  partnership? 

8.  Define  partnership  profits.    What  is  the  general  rule  for  division 

of  profits?  If  the  partnership  agreement  merely  provides  for 
division  of  profits,  how  will  losses,  if  any,  be  borne? 

9.  A  firm  composed  of  three  members  was  about  to  dissolve  part- 

nership and  go  out  of  business.  It  occupied,  and  had  for  many 
years,  premises  which  the  firm  leased  and  did  not  own.  One 
of  the  members,  without  the  knowledge  of  his  copartners, 
obtained  a  lease  of  these  premises  some  time  prior  to  the 
dissolution  of  the  firm,  but  when  it  was  contemplated;  the 
new  lease  to  begin  when  the  old  one  expired.  After  the 
dissolution,  he  sold  the  lease  for  a  large  sum  of  money.  Is 
he  under  any  obligation  to  account  to  his  partners  for  the 
profits  thus  realized  as  if  the  same  were  partnership  property  ? 
Give  reasons  for  your  answer. 
10.  A  and  B  are  in  partnership  under  a  written  agreement  whereby 
A  because  of  his  greater  investment  and  experience  is  to  have 
two-thirds  of  the  profits,  nothing  being  said  as  to  losses.     At 


360  PARTNERSHIP 

expiration  of  one  year  the  firm  dissolved,  having  lost  $5,000. 
How  will  this  loss  be  apportioned?    Why? 

11.  When  a  judgment  is  obtained  against  a  firm,  can  execution  be 

levied  on  the  personal  property  of  the  members? 

12.  How  should  the  assets  of  a  copartnership,  and  the  assets  of  the 

respective  individual  members  thereof,  be  applied  when  the 
several  members  owe  individual  debts  in  addition  to  the  debts 
owed  by  the  copartnership? 

13.  In  closing  books  to  ascertain  amounts  due  partners,  what  is  it 

necessary  to  do  in  order  to  bind  partners  to  results  shown? 


CHAPTER  XLVI 

POWERS  AND  LIABILITIES  OF  PARTNERS 

§297.     Powers  of  Partners 

In  a  partnership  each  partner  has  equal  authority  with 
the  others  and  is  held  to  be  the  agent  of  the  others,  and  of  the 
firm,  for  any  transactions  within  the  scope  of  the  partnership 
business.  Hence  each  partner  within  this  limit  is  bound  by  the 
acts,  the  contracts,  and  even  the  frauds  of  his  associates,  and 
is  responsible  for  the  obligations  and  liabilities  so  created  as 
fully  as  if  he  had  himself  acted  or  contracted. 

In  the  absence  of  special  restrictions  on  the  agency  powers 
of  the  partners,  they  are  limited  only  by  the  scope  of  the 
partnership  business  and  by  the  ordinary  limitations  of  the 
powers  of  agents.  Thus,  under  his  general  powers,  a  partner 
acting  alone  may  bind  the  firm  in  any  matter  p.operly  within 
its  business  operations.  He  must,  however,  be  authorized  be- 
fore he  can  bind  it  by  executing  a  sealed  instrument  in  the 
firm  name. 

Partnership  notes,  as  firm  obligations,  come  under  the 
general  rules  for  mutual  agency.  Every  member  of  a  trading 
firm  has  9.  right  to  make  and  indorse  notes,  and  to  make, 
accept,  and  indorse  drafts  and  other  commercial  paper  in  the 
firm  name.  One  of  the  members  may  use  this  power  fraudu- 
lently, or  for  his  private  benefit,  but,  unless  the  payee  or  owner 
of  the  note  is  aware  of  this  fact,  the  firm  is  liable  on  the  note. 

In  the  case  of  a  non-trading  or  professional  partnership, 
however,  it  is  not  customary  for  the  partners  to  bind  the  firm 
by   issuing  negotiable  paper,   and   unless   it  can  be  shown: 

361 


362  PARTNERSHIP 

( I )  that  the  partner  was  authorized  to  issue  commercial  paper, 
or  (2)  that  in  the  particular  business  it  was  in  accordance  with 
usage  for  the  partnership  to  bind  itself  in  this  manner,  the 
firm  is  not  bound. 

If  the  business  does  not  require  notes  or  contracts,  any  such 
instrument  signed  by  a  partner  with  the  firm  name  may  be 
rejected  or  accepted  at  discretion  by  the  firm.  If  rejected, 
it  cannot  be  enforced  against  the  firm,  though  the  partner 
signing  would  be  liable. 

A  person  with  a  claim  against  a  partner  cannot  safely  take 
in  settlement  a  note  signed  by  him  with  the  partnership  name, 
as  such  an  act  would  be  clearly  beyond  the  ordinary  authority 
of  the  partner,  but  if  such  a  note  were  issued  and  was  passed 
on  for  value  to  an  innocent  holder  it  would  bind  the  firm. 
An  indorsement  of  the  firm  name  by  a  partner  on  the  note 
of  a  third  party,  outside  of  the  scope  of  the  partnership  busi- 
ness, would  be  void. 

It  is  always  possible  to  restrict  the  powers  of  any  one  or 
all  of  the  partners  as  among  themselves  by  limitations  in  the 
articles.  Such  restrictions  do  not,  however,  affect  third  per- 
sons, unless  they  have  had  notice  of  the  same.  In  a  limited 
partnership,  the  partner  whose  liability  is  limited  can  take  no 
part  in  the  management.  In  such  a  case  the  limitations  of  his 
powers  and  the  general  nature  of  the  partnership  are  notified 
to  third  parties  under  the  provisions  of  the  laws  regulating 
such  partnerships. 

The  majority  rule  in  a  partnership,  each  partner  being 
entitled  to  an  equal  voice  in  the  management  of  its  affairs 
without  regard  to  the  amount  of  his  investment.  The  majority 
may  decide  all  matters  of  business  policy  and  all  questions 
relating  to  the  general  conduct  of  the  business,  and  when  and 
to  what  extent  profits  are  to  be  divided,  so  far  as  these 
matters  are  not  prescribed  in  the  articles  of  copartnership. 
The  majority  must,  however,  in  all  cases  rule  fairly,  must 


POWERS  AND  LIABILITIES  OF  PARTNERS  363 

consult  with  the  minority  in  regard  to  any  proposed  action, 
and  must  allow  the  minority  to  be  heard  in  discussion  of  the 
same.  They  cannot  apply  the  capital  to  new  undertakings 
outside  the  scope  of  the  partnership  business,  nor  can  they  seek 
their  own  interest  as  against  the  common  interest. 

Where  the  partners  are  evenly  divided  concerning  any 
proposed  action,  a  deadlock  results  and  those  who  want  to 
make  a  change  are  at  a  disadvantage.  In  a  partnership  of  two 
no  change  can  be  made  and  no  new  action  undertaken  unless 
both  can  agree.  Where  articles  of  copartnership  exist  no 
change  can  be  made  in  any  part  save  by  unanimous  consent 
of  all  the  members  of  the  firm.  Disputes  among  partners 
generally  result  in  dissolution  and  final  accounting.  Some 
partnership  agreements  provide  for  arbitration,  but  the  courts 
generally  refuse  to  sustain  arbitration  and  decree  a  dissolution 
instead. 

A  single  partner,  by  reason  of  his  powers  as  an  agent  of 
the  firm,  may  often  commit  his  associates  to  action  against 
their  wishes.  In  such  case,  the  only  remedy  is  to  dissolve  the 
partnership. 

A  partner  as  such  does  not  generally  have  authority  to 
do  any  of  the  following  acts,  except  where  his  partners  have 
wholly  abandoned  the  business  to  him  or  are  incapable  of 
acting: 

1.  To  confess  judgment. 

2.  To  dispose  of  the  good- will  of  the  business. 

3.  To  make  an  assignment  of  the  partnership  property 

to  a  creditor,  or  to  a  trustee  for  the  benefit  of  a 
creditor  or  of  all  creditors. 

4.  To  do  any  act  which  would  make  it  impossible  to 

carry  on  the  ordinary  business  of  the  partnership. 

5.  To  submit  partnership  claims  to  arbitration. 

As  to  partner's  power  over  firm  property,  see  §  294. 


364  PARTNERSHIP 

Notes: 

1.  If  any  restriction  is  to  be  made  on  the  agency  powers 

of  a  partner,  all  those  dealing  with  the  firm  should 
be  notified  in  order  to  protect  the  firm. 

2.  A  person  dealing  with  a  partner  is  bound  to  know 

what  the  nature  of  his  business  is,  and  it  is  his 
own  fault  if  he  accepts  notes  and  contracts  that 
are  void  because  they  are  not  within  the  limits 
of  the  partnership  business. 

3.  If  a  partner  is  not  trustworthy,  he  may  bind  his  co- 

partners without  right. 

§  298.     Liabilities  to  Copartners 

Partnership  is  practically  a  personal  relation,  and  those 
who  enter  it  are  expected  to  act  honestly  and  fairly  toward 
their  associates.  No  partner  may  seek  his  own  advantage  at 
the  expense  of  his  associates,  nor  may  he  make  any  personal 
and  private  profit  out  of  a  transaction  in  the  line  of  the  part- 
nership business.  All  transactions  must  be  for  the  common 
good,  and  in  important  matters  a  partner  should  consult  his 
associates  before  taking  action, 

A  partner  will  not  be  allowed  to  retain  an  unfairly  made 
profit,  nor  to  compete  with  his  firm.  He  may,  unless  ex- 
pressly restricted  by  his  partnership  agreement,  carry  on  an 
independent  non-competing  business  of  his  own,  provided  that 
it  does  not  interfere  with  his  duty  to  his  firm.  Any  profit 
made  in  a  competing  business,  or  in  a  business  that  did  inter- 
fere with  the  firm  business  would  be  held  to  have  been  made 
for  the  firm,  and  the  other  partners  could  compel  their  asso- 
ciate to  account  for  his  unfair  profits.  He  would  be  a  trustee 
for  the  firm  for  any  gains  made,  A  partner  would  also  be 
a  trustee  for  any  property  purchased  in  his  name  with  partner- 
ship funds. 

In  the  absence  of  any  restrictions  in  the  articles,  a  partner 


POWERS  AND  LIABILITIES  OF  PARTNERS  365 

may  give  to  non-competing  ventures  time  which  might  have 
been  devoted  to  partnership  affairs.  He  may  also  use  informa- 
tion acquired  by  him  in  the  partnership  business  in  his  private 
undertakings,  provided  these  latter  are  not  within  the  scope  of, 
and  do  not  compete  with,  the  business  of  the  firm. 

Notes: 

1.  Good  faith  is  necessary  in  all  dealings  between  part- 

ners. 

2.  The  partnership  agreement  should  provide  that  each 

partner  shall  give  his  whole  time,  or  a  specified 
part  of  his  time,  to  the  partnership  affairs. 

3.  A  partner  can  retire  at  any  time  and  so  dissolve  the 

partnership. 

4.  A  retiring  partner  should  examine  the  local  laws 

with  care  to  make  sure  he  has  complied  with  the 
legal  requirements  for  notice  of  the  severing  of 
his  connection  with  the  firm. 

§  299.    Intra-Partnership  Relations 

A  partnership  is  not  a  separate  entity  as  is  a  corporation. 
It  cannot  sue  or  be  sued  in  the  firm  name.  Suit  against  a 
firm  or  by  a  firm  is  a  suit  against  or  by  the  individuals  who 
comprise  it.  Therefore  a  partner  cannot  sue  the  firm,  neither 
can  the  firm  sue  one  of  its  members. 

In  event  of  partnership  controversies,  which  cannot  be  set- 
tled by  conference,  by  buying  out  one  or  more  partners,  or  by 
arbitration,  the  only  recourse  is  a  dissolution  and  accounting, 

A  partner  cannot  sue  another  partner  for  any  matter  re- 
lating to  the  partnership  but  can  sue  him  for  any  individual 
cause  not  relating  to  the  partnership. 

Two  partnerships  having  common  members  or  a  common 
member  cannot  bring  suit  against  each  other.  In  some  part- 
nership cases  when  actions  at  law  will  not  lie,  an  action  may 
be  brought  in  equity  but  in  such  case  it  usually  means  the 


366  PARTNERSHIP 

dissolution  of  the  firm.     The  general  rules  of  equity  in  part- 
nership cases  are: 

1.  Not  to  interfere  except  to  dissolve  the  partnership. 

2.  Not  to  interfere  in  internal  disputes. 

3.  Not  to  interfere  on  behalf  of  the  offending  party 

or  where  the  party  applying  has  been  negligent 
in  making  application. 

In  some  cases,  however,  a  court  of  equity  will  grant  an 
injunction  without  decreeing  a  dissolution.  It  would  require 
legal  advice  to  ascertain  when  the  aid  of  equity  can  be  had 
in  a  partnership  controversy. 

§300.     Liabilities  to  Third  Persons 

Where  a  partnership  is  admitted  or  proved,  and  where  a 
contract  within  the  scope  of  the  partnership  business  has  been 
made  by  a  partner,  each  individual  partner  is  liable,  and  in  case 
judgment  is  had  against  the  firm,  executions  may  be  levied  on 
the  firm  property,  or  on  the  separate  property  of  any  one  of 
the  partners.  That  is,  the  creditors  may  take  judgment  against 
all  the  partners  and  may  then  proceed  to  collect  their  claims 
from  firm  assets  or  from  the  property  of  any  one  or  more  of 
them,  leaving  the  partners  to  adjust  the  matter  between  them- 
selves afterward  as  best  they  may. 

A  partner  is  liable  in  damages  for  the  torts,  frauds,  and 
wrongdoing  of  his  partner  within  the  scope  of  the  partnership 
business,  but  usually  he  will  not  be  held  criminally  liable. 

A  partner  who  has  been  taken  in  after  the  partnership 
has  been  formed  is  not  responsible  for  obligations  or  acts  of 
the  firm  prior  to  his  entrance,  unless  he  expressly  assumes  them. 

Notes: 

I.  In  order  to  enforce  partnership  liability,  third  per- 
sons must  as  a  rule  prove  the  existence  of  a 
partnership. 


POWERS  AND  LIABILITIES  OF  PARTNERS  367 

2.     The  onerous  character  of  partnership  Hability  de- 
mands prudence  in  selecting  a  partner. 


Review  Questions 

1.  What  relation  of  a  partner  to  the  firm  gives  him  authority  to 

act?     What  is  the  Hmit  to  this  authority? 

2.  Has  a  partner  authority  to  make  and  indorse  commercial  paper 

for  his  firm?  If  he  discounts  the  firm  note  for  his  own 
benefit,  is  the  firm  liable?  What  is  the  rule  for  professional 
partnerships? 

3.  What  eflFect  do  limitations  on  partners'  powers  in  articles  of 

copartnership  have  on  outsiders? 

4.  A  sells  goods  to  a  partnership  on  the  customary  terms  in  his 

line,  namely,  four  months'  credit.  The  goods  are  delivered 
and  used  by  thfe  firm,  but  when  the  amount  is  due,  payment 
is  refused  on  the  ground  that  the  partnership  articles  stipulate 
that  no  partner  shall  bind  the  firm  to  a  time-purchase  contract, 
but  that  all  purchases  shall  be  cash.  A  knew  of  this  agree- 
ment.    Can  he  recover?     Explain  the  theory. 

5.  How  are  differences  of  opinion  settled  in  a  partnership? 

6.  What  things  are  beyond  the  authority  of  a  partner  to  do  unless 

specially  authorized? 

7.  May  a  partner  take  part  of  his  time  for  his  own  affairs?    What 

is  the  effect  if  he  engages  in  a  business  that  competes  with 
the  firm  business? 

8.  Can   one   partner   sue   another?     Can   one   partner   bring  suit 

against  the  firm?  Can  the  firm  bring  suit  against  one  of  its 
members  ? 

9.  May  one  partner  bring  suit  against  another  for  what  may  be 

due  him  on  partnership  account? 
ID.     If  a  partner  buys  a  debt  against  his  firm,  can  he  collect  it  by 
law? 

11.  What  is  the  liability  of  an  incoming  partner? 

12.  Is  the  new  member  liable  to  creditors  of  the  old  firm  by  a  con- 

tract made  with  the  members  of  the  old  firm  to  assume  the 
old  debts  and  be  liable  for  them  as  old  members? 

13.  When  would  a  partner  be  a  trustee  for  his  firm? 


CHAPTER  XLVII 

TERMINATION  OF  PARTNERSHIP 

§  301.     Termination  by  Agreement 

Upon  the  expiration  of  its  term  as  limited  by  the  partner- 
ship articles,  the  partnership  will  be  dissolved  in  any  particular 
manner  prescribed  by  the  articles,  or,  in  the  absence  of  such 
provisions,  in  accordance  v^ith  the  rules  of  law. 

A  partnership  may  be  dissolved  at  any  time  by  unanimous 
agreement  regardless  of  the  period  fixed  by  the  articles.  If 
any  of  the  partners  wish  to  continue  the  business,  they  may 
buy  out  partners  who  wish  to  retire  or  who  are  dissatisfied. 

In  many  cases  the  most  satisfactory  method  of  disposing 
of  a  partnership  business  worth  preserving,  is  by  incorpora- 
tion. This  is  preeminently  a  dissolution  by  agreement.  (For 
methods  of  incorporation,  see  Chapter  L.) 

§  302.     Enforced  Dissolution 

A  partnership  may  be  terminated  by  the  death  or  bank- 
ruptcy of  a  partner,  or  by  the  sale  of  his  interest.  It  may  also 
be  dissolved  because  of  the  impossibility  of  continuing  the 
business  for  any  reason,  or  by  the  bankruptcy  of  the  firm. 
Mere  insolvency  may  exist  for  an  indefinite  period  without 
affecting  the  partnership  relation,  but  an  assignment  by  the 
firm  for  the  benefit  of  creditors,  or  an  adjudication  of  bank- 
ruptcy terminates  the  partnership. 

If  a  partner  sells  his  interest  in  the  firm  to  a  stranger,  it 
would  usually  terminate  the  partnership.  Neither  the  stranger 
nor  the  other  partner  or  partners,  can  be   forced  to  accept 

368 


TERMINATION  OF  PARTNERSHIP  369 

each  other  as  partners  and  either  can  take  steps  to  wind  up 
the  firm's  business. 

If  a  partner  wishes  to  terminate  his  partnership  relations, 
he  may  do  so  at  any  time  simply  by  giving  notice:  (i)  to 
the  members  of  his  firm,  (2)  to  those  dealing  with  the  firm, 
and  (3)  to  the  public  generally.  If  the  partnership  was  for 
a  given  term  which  has  not  expired,  the  partner  may  be  liable 
in  damages  to  his  associates  for  his  breach  of  the  partnership 
contract,  but  he  cannot  be  compelled  to  remain. 

After  giving  proper  public  notice  of  his  withdrawal,  the 
retiring  partner  is  no  longer  liable  for  the  future  transactions 
and  obUgations  of  the  firm.  He  remains  liable,  however,  on 
the  obligations  contracted  while  he  was  a  member  of  it.  The 
matter  of  notice  is  important,  as  it  is  the  only  way  in  which 
liability  for  the  future  obligations  of  the  firm  may  be  escaped. 

Owners  of  a  business  concern  which  had  changed  from  a 
partnership  to  a  corporation  have  been  held  personally  liable 
for  the  debts  of  the  corporation  because  they  neglected  to 
notify  those  with  whom  they  were  dealing  that  the  business 
had  been  incorporated. 

When  a  partner  dies  or  becomes  bankrupt,  or  when  war  is 
declared  between  the  countries  to  which  the  respective  partners 
belong,  the  partnership  is  forthwith  terminated,  the  relation 
of  mutual  agency  ceases,  and  neither  a  partner  nor  the  rep- 
resentative of  a  partner  can  bind  the  partnership  nor  the 
property  or  estate  of  either  partner  further.  Nothing  can  be 
done  except  to  liquidate,  pay  debts,  and  wind  up  the  partner- 
ship affairs. 

The  insanity  of  a  partner  does  not  work  a  dissolution,  but 
may  be  a  sufficient  reason  for  asking  a  dissolution  by  decree. 
If  the  insanity  is  temporary,  the  courts  will  not  decree  a 
dissolution. 

Where  it  becomes  apparent  that  only  loss  can  result  from 
the  further  prosecution  of  the  partnership  business,  any  part- 


2,^0  PARTNERSHIP 

ner,  if  his  associates  will  not  agree  to  a  peaceable  termination 
of  the  business,  can  obtain  a  judicial  dissolution. 

A  breach  of  the  articles  of  partnership  by  any  of  the  part- 
ners, bad  faith,  or  misconduct  so  serious  as  to  affect  the  credit 
and  success  of  the  business  or  to  make  it  impossible  for  his 
associates  to  work  with  him,  is  good  ground  for  dissolution. 

In  case  a  person  has  been  induced  to  enter  a  partnership 
by  false  representations,  he  can  at  once  dissolve  the  firm  or 
bring  suit  to  have  the  whole  contract  rescinded  and  cancelled. 

In  all  of  these  cases,  proceedings  may  be  instituted  to 
have  the  partnership  dissolved  and  to  secure  an  accounting.  If 
necessary,  an  injunction  may  usually  be  had  restraining  the 
defendant  partners  from  making  new  firm  obligations,  from 
interfering  with  or  disposing  of  firm  property,  or  from  further 
conduct  of  the  firm  business.  The  appointment  of  a  receiver 
is  an  extreme  measure  to  be  resorted  to  only  when  the  interests 
of  some  member  of  the  firm,  or  of  outside  creditors  are  in 
urgent  need  of  protection.    The  courts  are  slow  to  grant  it. 

The  right  to  an  accounting  is  a  necessary  corollary  to  the 
right  to  profits.  An  accounting  is  a  necessary  incident  of  a 
dissolution  unless  the  parties  have  already  agreed  upon  a  settle- 
ment, which  would  be  a  bar  to  the  right.  The  usual  procedure 
is  to  appoint  a  referee,  or  refer  the  accounting  to  a  Master  in 
Chancery  to  examine  and  report  the  terms  of  the  partnership, 
the  accounts  that  have  been  kept,  the  capital  invested  and  with- 
drawn, the  profits  and  the  losses,  the  assets  and  liabilities,  and 
the  proportion  in  which  these  should  be  shared  among  the 
partners.  The  court  then  makes  its  orders  in  accordance  with 
this  report,  and  the  receiver,  or  the  partner  or  partners  in 
charge,  will  close  up  the  business  pursuant  to  these  directions. 

Notes: 

I,     Where  it  is  necessary  actually  to  wind  up  the  busi- 
ness, any  agreement  reached  between  the  partners 


TERMINATION  OF  PARTNERSHIP  37 1 

should  provide  for  a  trustee  to  take  charge  of  the 
settlement  on  behalf  of  the  partners.  The  agree- 
ment should  direct  the  closing  up  of  the  business, 
the  liquidation  of  its  assets,  the  collection  of  out- 
standing debts,  the  settlement  of  its  obligations, 
the  partition  of  losses  or  the  division  of  profits, 
and  the  withdrawal  of  the  investments  of  the 
partners. 

2.  Under  no  circumstances  have  the  partners  in  an 

ordinary  partnership  the  right  to  expel  an  objec- 
tionable member.  The  only  way  to  get  rid  of  such 
a  partner  is  through  a  dissolution  of  the  copart- 
nership. 

3.  The  legal  enforced  dissolution  of  a  partnership  is 

slow  and  costly  and  if  possible  should  be  avoided. 
Almost  any  agreed  dissolution  would  be  better. 

§  303.     \yinding  Up  the  Business 

Rights  and  Interests  of  Partners.  Unless  otherwise 
agreed,  the  amount  of  each  partner's  investment  is  returned 
to  him  in  full  on  dissolution  of  the  partnership,  if  there  are 
sufficient  assets.  Any  remainder,  as  profits  of  the  business,  is 
then  divided  in  equal  proportion  among  the  partners.  If  losses 
have  been  incurred,  the  losses  must  first  be  apportioned  equally 
among  the  partners,  and  the  amount  to  be  paid  each  on  his 
investment  account  must  be  diminished  by  this  amount. 

If  one  or  more  partners  are  bought  out,  the  business  passes 
as  a  going  concern  into  the  hands  of  the  remaining  partners. 
If  the  partnership  is  dissolved  by  proceedings  in  equity  or  in 
bankruptcy,  the  receiver  or  trustee  takes  charge,  and  the  part- 
ners turn  over  the  assets  to  the  receiver  and  have  nothing 
further  to  do  with  the  business  other  than  to  give  such  in- 
formation as  will  aid  him  in  his  work. 

If  the  partnership  is  incorporated,  the  corporation  usually 


372  PARTNERSHIP 

succeeds  to  the  assets,  name,  good-will,  and  location  of  the 
firm,  and  the  business  is  continued  as  a  going  concern  with 
the  minimum  of  disturbance. 

Duties  of  Partners  on  Dissolution.  If  the  business  is 
terminated  by  agreement,  by  limitation,  or  by  the  death,  in- 
sanity, or  insolvency  of  a  partner,  it  is  usually  wound  up  by 
the  surviving  or  liquidating  partner  or  partners. 

When  surviving  or  liquidating  partners  take  charge,  it  is 
their  duty  to  notify  people  who  have  dealt  with  the  firm  of 
its  dissolution  and  of  the  fact  that  they  are  engaged  in  wind- 
ing up  affairs.  It  is  also  the  duty  of  these  partners  to  dispose 
of  and  fulfil  any  existing  contracts,  to  dispose  of  the  partner- 
ship property  to  the  best  advantage,  to  discharge  all  debts  and 
obligations,  and  to  turn  over  to  each  person  entitled  thereto 
his  due  proportion  of  the  surplus. 

Right  of  Surviving  Partner.  In  the  case  of  the  death  or 
resignation  of  a  partner,  the  surviving  partner  or  partners 
have  a  right  of  possession  for  the  purpose  of  settling  up  the 
affairs  of  the  partnership,  but  after  this  is  done  the  right  of 
possession  ceases,  and  each  of  the  partners  has  the  right  only 
to  his  proportion  of  the  partnership  assets  when  converted  into 
cash. 

A  surviving  partner  or  partners  would  have  power  to  sell 
property  of  the  firm  and  do  all  other  things  necessary  to  wind 
up  the  business. 

After  the  assets  of  the  firm  have  been  turned  into  cash 
and  the  debts  have  been  paid,  it  is  the  duty  of  the  surviving 
or  liquidating  partners,  first,  to  repay  any  advances  above  the 
stipulated  investment  of  capital  to  the  partners  who  made 
them;  next,  if  the  funds  permit,  to  return  the  capital  of  each 
partner.  Any  surplus  is  then  divided  among  the  partners  in 
such  proportion  as  the  partnership  agreement  may  provide,  or, 
if  there  is  no  provision  therefor,  in  equal  proportion. 

The  surviving  partner,  if  he  continues  the  business,  must 


TERMINATION  OF  PARTNERSHIP  373 

account  for  the  value  of  the  good-will  of  which  the  firm  name 
is  part. 

Notes: 

1.  Surviving  or  liquidating  partners  have  no  power  to 

bind  the  firm  to  new  contracts  or  to  undertake 
new  business.  Ordinarily  they  are  not  entitled 
to  compensation  for  their  services  in  settling  the 
firm's  affairs,  unless  the  business  is  to  be  carried 
on  for  some  time. 

2.  The  good-will  of  a  business  is  often  a  most  valuable 

asset.  To  secure  compensation  both  for  the  good- 
will and  the  firm  name,  it  is  usually  necessary  to 
sell  the  business  as  a  going  concern. 


Review  Questions 

1.  In  the  absence  of  an  express  agreement,  what  is  the  rule  for 

determining  the  duration  of  a  partnership? 

2.  How  could  a  partnership  be  terminated  by  one  of  the  partners 

before  the  time  fixed  in  the  articles? 

3.  What  happenings  will  terminate  the  partnership  relation? 

4.  Can  a  partner  sell  his  interest  in  a  firm,  and  if  so,  would  the 

purchaser  be  a  member  of  the  firm? 

5.  A,  who  is  in  partnership  with  B,  desires  to  withdraw  from  the 

firm  because  of  B's  business  methods.  A  ofifers  to  sell  his 
share  to  B.  The  latter  refuses  to  purchase.  A  then  assigns 
his  interest  in  the  business  to  C,  but  B  refuses  to  accept  C 
as  a  partner.    What  are  C's  rights? 

6.  What  notice  should  a  retiring  partner  give?    Why? 

7.  If  a   retiring  partner  agreed   with  those   remaining  that  they 

should  assume  all  debts,  would  that  protect  him  as  against 
existing  creditors? 

8.  Would  the  admission  of  a  new  member  terminate  the  old  part- 

nership and  create  a  new  one  in  law  ?  Need  it  have  that  effect 
in  practice? 

9.  When  may  a  receiver  be  appointed? 


374  PARTNERSHIP 

10.  Why  should  an  enforced  dissolution  be  avoided?    Suggest  some 

better  methods  of  winding  up  a  partnership. 

11.  In  winding  up  the  affairs  of  a  partnership:   (i)    What  is  the 

rule  as  to  investments?  (2)  What  is  the  rule  as  to  profits? 
(3)   What  is  the  rule  as  to  losses? 

12.  Is  the  capital  of  each  partner  necessarily  the  amount  due  him 

irom  the  firm?  In  your  state  has  a  special  partner  prior 
right  over  the  other  partners  in  the  distribution  of  the  capital 
surplus  ? 

13.  In  case  of  death  of  a  partner,  to  whom  does  legal  title  to  firm 

assets  pass?  Can  a  sole  surviving  partner  sell  property  and 
give  good  title?  Can  a  sole  surviving  partner  make  a  general 
assignment  without  consent  of  representatives  of  deceased? 


PART  IX 
CORPORATIONS 


CHAPTER  XLVIII 

NATURE  OF  CORPORATIONS* 

§  304.     Corporate  Entity 

A  corporation  is  an  artificial  person,  created  or  authorized 
by  the  law  for  some  particular  purpose  or  purposes.  It  has, 
therefore,  only  those  rights  and  powers  which  are  given  it 
by  the  law.  These  vary  in  the  different  states  but  are  in  all 
cases  sufficient  for  the  demands  of  ordinary  business. 

A  corporation  is  usually  composed  of  a  number  of  persons 
associated  together,  though  it  may,  and  sometimes  does,  con- 
sist of  but  one  or  two  members.  These  members,  or  stock- 
holders, are  not,  however,  the  corporation.  They  compose  it, 
but  the  corporation  has  a  name,  an  entity,  and  an  existence 
of  its  own,  entirely  apart  and  distinct  from  that  of  these 
members.  Under  its  corporate  name  it  may  conduct  business, 
make  contracts,  and  bring  suit.  So  absolutely  different  is  the 
corporation's  existence  from  that  of  its  stockholders  that  it 
may  enter  into  contracts  with  these  latter,  may  sue  them,  or 
be  sued  by  them. 

305.     Classification 

A  logical  classification  is  that  which  separates  all  corpora- 
tions into:  (i)  public  and  (2)  private  corporations. 

Public  corporations  are  those  formed  by  the  community 
for  its  own  governmental  purposes,  as  in  cities,  villages,  and 
towns.    These  are  also  called  municipal  corporations. 

All  other  corporations  are  private  corporations. 

Corporations  formed  to  conduct  public  utilities,  such  as 


See   Chapters  CVI  to   CVIII,   corporate  forms. 

377 


378  CORPORATIONS 

railroads,  turnpikes,  and  telegraph  systems,  or  to  supply  water, 
gas,  and  electricity,  if  they  are  conducted  for  private  gain, 
are  properly  classed  as  private  corporations.  They  are  some- 
times called  "quasi-public  corporations"  because  they  render 
services  more  or  less  essential  to  the  public.  More  often  they 
are  termed  "public  utility  corporations." 

A  moneyed  corporation  is  one  authorized  to  engage  in 
the  business  of  using  money  for  the  sake  of  making  a  profit 
upon  it  as  money,  such  as  banks,  mortgage  loan  or  trust  com- 
panies, insurance  companies,  etc. 

Corporations  may  also  be  classed  as:  (i)  corporations 
sole,  those  consisting  of  a  single  person;  and  (2)  corporations 
aggregate,  those  consisting  of  two  or  more  persons. 

Private  corporations  may  be  divided  into  corporations 
without  capital  stock  and  corporations  with  capital  stock. 

§306.     Corporations  Without  Capital  Stock 

Most  religious,  educational,  charitable  (eleemosynary), 
and  social  organizations  belong  to  this  class.  They  are  non- 
stock, or  membership  corporations.  In  some  cases  certificates 
of  membership  are  issued  to  the  members,  but  these  are  not 
stock  certificates  and  are  not  usually  transferable.  When 
corporate  action  is  taken,  each  member  has  one  vote  without 
regard  to  the  amount  of  his  financial  interests,  if  any,  in  the 
corporation. 

The  body  of  modern  corporation  law  has  to  do  with  the 
stock  corporation. 

§  307.     Corporations  With  Capital  Stock 

Stock  corporations  have  a  capital  stock  divided  into  shares, 
usually  of  like  amount,  which  are  evidenced  by  transferable 
certificates  of  stock.  These  stock  certificates  are  issued  to  the 
members  of  the  corporation,  who  are  termed  stockholders,  the 
certificates  evidencing  the  number  of  shares  which  each  owns. 


NATURE  OF  CORPORATIONS  379 

The  ultimate  control  of  the  corporation  rests  with  the 
stockholders,  who  act  in  meetings  and  by  vote.  Each  share 
of  stock  usually  entitles  its  owner  to  one  vote  in  stockholders' 
meetings  hence  those  owning  a  majority  of  the  shares  con- 
trol the  corporation.  When  profits  are  to  be  divided,  they  are 
distributed  among  the  stockholders  in  proportion  to  the  num- 
ber of  shares  owned  by  each. 

On  account  of  the  convenience  of  the  system,  all  corpora- 
tions intended  for  profit  are  organized  as  stock  corporations. 

§  308.     Distinctive  Features 

The  distinctive  features  of  a  modem  stock  corporation 
may  be  summarized  as  follows: 

1.  Its  creation  and  regulation  by  the  state. 

2.  The  limitation  of  the  corporate  powers  to  the  objects 

specified  at  the  time  of  its  creation,  or  later  by 
amendment. 

3.  The  limitation  of  the  liabilities  of  the  stockholders. 

4.  The  distinct  entity  of  the  corporation  for  all  legal  and 

business  purposes. 

5.  The  comparative  permanence  of  its  organization. 

6.  The  representation  of  the  interests  of  the  stockholders 

in  the  corporation  by  transferable  shares  of  stock. 

7.  The  corporate  mechanism  of  directors,  officers,  and 

agents,  working  under  definite  rules  of  action. 

These  features  are  possessed  by  every  stock  corporation, 
and  every  organization  possessing  them  is  a  stock  corporation. 

§309.     (i)  Creation  by  the  State 

A  partnership  may  be  formed  by  the  mere  agreement  of 
the  parties.  A  corporation,  on  the  contrary,  may  be  created 
only  by  the  state.  Formerly  each  corporation  was  created  by 
a  separate  legislative  enactment.     Today  the   formation  of 


380  CORPORATIONS 

corporations  is  governed  by  general  laws.  These  laws  vary 
in  minor  details  in  the  different  states.  All  are  alike  in  their 
general  plan  and  scope.  In  each  state,  the  legal  requisites  are 
to  be  found  in  the  state  law. 

§  310.     (2)  Limited  Powers 

An  individual  or  a  partnership  may  engage  in  any  business 
that  seems  best,  and  may  change  from  one  business  to  another 
at  pleasure.  A  corporation,  on  the  contrary,  is  limited  to  those 
purposes  enumerated  in  its  charter.  If  it  is  desired  to  engage 
in  any  other  business,  it  must  amend  its  charter. 

§311-     (3)  Limited  Liability 

Subscribers  to  the  stock  of  a  corporation  are  liable  to  the 
corporation  for  their  subscriptions.  Calls  for  payment  on  un- 
paid stock  must  be  impartial  and  uniform,  that  is  to  say,  calls 
must  be  made  on  all  subscribers  alike.  If  the  subscriptions 
have  not  been  paid,  the  corporation,  or  its  creditors  in  case 
of  its  insolvency,  can  compel  payment.  A  subscriber  cannot 
repudiate  his  subscription.  If  subscriptions  have  been  accepted 
by  the  corporation  at  less  than  par,  corporate  creditors  can 
usually  force  payment  of  such  additional  amounts  as  will 
render  the  stock  full-paid.     (See  §353.) 

A  subscriber  to  stock  who  fails  to  make  his  payments  is 
chargeable  with  interest  from  the  time  he  makes  default.  He 
must  pay  both  principal  and  accrued  interest  before  he  can 
claim  a  negotiable  certificate  of  stock.^ 

A  subscriber  to  stock,  being  sued  for  payment,  and  claim- 
ing that  he  was  induced  to  subscribe  through  fraud,  must 
show  that  the  agent  was  duly  authorized  by  the  corporation, 
that  his  statements  were  in  fact  of  the  condition  of  the  cor- 
poration in  past  or  present  time  and  that  his  representations 
did  materially  influence  the  subscriber  to  take  the  stock. 


'Cook   on    Corporations,    112. 


NATURE  OF  CORPORATIONS  381 

Beyond  this  liability,  known  as  the  subscription  liability, 
stockholders  have  in  most  states  no  individual  liability  for  any 
indebtedness  of  the  corporation. 

§312.     (4)  Legal  Entity  of  Corporation 

The  distinct  legal  entity  of  the  corporation  may  best  be 
shown  by  a  comparison  between  corporations  and  partnerships. 
The  difference  is  radical. 

A  partnership  is  merely  a  collection  of  all  the  individual 
partners.  Hence  each  partner  represents  the  partnership  fully, 
can  make  contracts  for  it  without  consultation  with  other  part- 
ners, and  can  bind  it  by  his  action.  On  the  other  hand,  he 
cannot  contract  with  his  partnership,  bring  suit  against  it,  or 
be  sued  by  it,  any  more  than  he  could  so  act  with  or  against 
himself.  In  any  suit  by  or  against  a  partnership  each  partner 
must  be  named. 

A  corporation,  on  the  contrary,  is  itself  a  legal  entity, 
distinct  from  its  stockholders.  These  stockholders  as  indi- 
viduals do  not  represent  it,  cannot  make  contracts  for  it,  nor 
bind  it  in  any  way.  Each  may,  however,  deal  with  the  cor- 
poration as  with  a  stranger,  may  contract  with  it,  may  sue  it, 
may  be  sued  by  it.  A  corporation  sues  or  may  be  sued  by  its 
corporate  name  and  the  members'  or  stockholders*  names  do 
not  appear. 

§313-     (5)  Permanence 

A  partnership  may  be  dissolved  at  any  time,  at  the  will 
of  any  partner,  and  is  necessarily  dissolved  if  a  partner  dies, 
becomes  insolvent,  or  sells  out  to  a  stranger.  A  corporation, 
on  the  contrary,  continues  for  the  term  of  its  existence,  un- 
interrupted by  the  dissatisfaction,  financial  embarrassment, 
death,  or  retirement  of  its  stockholders.  Its  entire  member- 
ship may  change  again  and  again,  but  the  corporation  con- 
tinues. 


382  CORPORATIONS 

§314.     (6)  Stock  System 

The  division  of  the  stock  of  the  corporation  into  shares 
represented  by  stock  certificates,  transferable  by  indorsement, 
is  one  of  the  most  convenient  features  of  the  modern  corporate 
system.  It  permits  the  investment  of  varying  amounts,  and 
gives  each  investor  his  proper  proportionate  interest  both  in 
the  management  and  in  the  resulting  profits  of  the  business. 
It  permits  a  ready  sale  of  part  or  all  of  the  stockholder's  in- 
terest to  some  other  investor.  In  case  of  his  death  it  renders 
the  transfer  or  division  of  his  interest  a  simple  matter.  It  is 
in  striking  contrast  to  the  difficulty  of  transferring  an  interest 
in  an  ordinary  partnership. 

§315-     (7)  Corporate  Mechanism 

A  corporation  is  created  by  the  grant  of  a  charter  from 
the  state,  which  in  general  terms  defines  the  rights  and  powers 
of  the  corporation.  After  this  charter  has  been  allowed,  the 
incorporators  hold  a  meeting  and  adopt  by-laws  which  lay 
down  the  lines  along  which  the  business  of  the  corporation 
is  to  be  conducted.  The  stockholders  elect  a  board  of  directors, 
which,  subject  to  the  regulations  of  the  charter  and  by-laws, 
controls  and  manages  the  business  and  property  of  the  corpora- 
tion. 

The  directors  at  their  first  meeting  elect  officers  and  take 
such  other  action  as  may  be  necessary  to  inaugurate  the  cor- 
porate activities.  Thereafter  they  hold  their  meetings  from 
time  to  time  as  may  be  required  by  the  by-laws  or  the  necessi- 
ties of  the  business. 

§316.    Attractiveness  to  Investors 

As  a  consequence  of  the  advantages  enumerated,  and  be- 
cause of  the  liabilities  and  inconveniences  oJ  the  partnership, 
the  corporate  form  is  peculiarly  attractive  to  the  investing 


NATURE  OF  CORPORATIONS  383 

public.  Created  by  the  state  for  a  fixed  period,  it  is  not 
liable  to  sudden  or  unexpected  termination.  The  rights  and 
liabilities  of  all  concerned  are  defined  by  law  and  well  settled 
by  custom.  It  permits  investment  to  a  definite  extent  without 
indefinite  or  continuing  liability  and  without  the  necessity  of 
the  investor  becoming  identified  with  tlie  management. 


§317,     Disadvantages  of  the  Corporate  Form 

The  disadvantages  of  incorporation  result  from  the  fact 
that  special  reports  and  special  taxes  are  required  of  corpora- 
tions, above  those  required  of  sole  traders  or  partnerships. 

Most  states  require  reports  as  follows: 

1.  Local  tax  reports. 

2.  State  tax  reports. 

3.  Federal  tax  reports. 

4.  Annual  reports  of  officers,  etc. 

5.  Reports  in  each  state  outside  the  home  state  in  which 

the  corporation  does  business. 

The  taxes  paid  by  corporations  at  various  times  are  as 
follows : 

1.  Organization  taxes  payable  to  the  state  for  incor- 

poration. 

2.  Annual  franchise  taxes  paid  to  the  state  under  the 

laws  of  which  it  was  incorporated. 

3.  Annual  taxes  on  property. 

4.  Federal  income  and  excess  profits  taxes. 

5.  Inheritance  taxes  on  stock. 

6.  Stock-transfer  tax. 

7.  Taxes  and  license  fees  in  each  state  outside  the  home 

state  in  which  the  corporation  does  business. 

8.  Excise  taxes. 


384  CORPORATIONS 

Review  Questions 

1.  What   is   a   corporation?     Distinguish   a   corporation   from   its 

membership. 

2.  Distinguish  between  public  and  private  corporations.    What  are 

pubHc  utility  corporations?     What  is  a  moneyed  or  financial 
corporation? 

3.  Distinguish  between  stock  and  non-stock  corporations.    To  which 

class  do  all  business  corporations  belong? 

4.  What  are  shares  of  stock?     What  are  stock  certificates? 

•  5.     What  is  a  moneyed  corporation?     What  is  a  corporation  sole? 
What  is  a  corporation  aggregate? 

6.  What  are  the  seven  distinctive  features  of  a  modern  stock  cor- 

poration ? 

7.  How  is  a  corporation  formed  in  your  state,  and  what  are  the 

legal  requisites  for  incorporation? 

8.  What  is  the  difference  between  the  powers  of  a  corporation  and 

the  powers  of  a  partnership  as  to  what  business  it  engages  in  ? 

9.  In  case  a  corporation  is  insolvent,  to  what  extent  are  subscribers 

liable?     What  remedies  has  a  corporation  on  an  unpaid  sub- 
scription to  capital  stock? 

10.  What  is  meant  by  "the  distinct  legal  entity"  of  the  corporation? 

How  does  a  partnership  sue?     How  does  a  corporation  sue? 

11.  Why  is  a  corporation  more  permanent  than  a  partnership? 

12.  How  can  an  interest  in  a  corporation  be  transferred?    How  can 

an  interest  in  a  partnership  be  transferred? 

13.  Explain  the  stock  system. 

14.  What  is  meant  by  the  corporate  mechanism? 

15.  Why  is  the  corporation  form  attractive  to  investors?     Why  is 

the  corporate  form  used  for  most  large  business  enterprises? 

16.  What  disadvantages  attach  to  the  corporate  form? 


CHAPTER  XLIX 
THE  CHARTERS 

§  318.     Definition — Synonyms 

The  terms,  certificate  of  incorporation,  articles  of  associa- 
tion, etc.,  are  synonymous  with  the  older  and  briefer  word, 
charter.  A  charter  is  the  formal  authority  from  the  state  for 
the  existence  of  a  corporation.  It  is  to  the  corporation  what 
a  constitution  is  to  a  civil  government.  It  is  the  foundation 
upon  which  the  corporate  structure  is  built. 

The  charter  creates  the  corporation  and  authorizes  certain 
specified  individuals  to  organize  it  and  conduct  its  operations. 
Charters  were  formerly  granted  only  by  special  legislative 
enactment.  Now  they  may  be  secured  under  general  laws  and 
in  many  states  can  be  secured  in  no  other  way. 

Charters  are  granted  under  different  statutes  varying  in 
terms  and  requirements  according  to  the  purposes  of  the 
corporation.  The  simplest  charter  is  usually  that  provided 
for  a  manufacturing  or  mercantile  business.  The  require- 
ments and  limitations  for  the  charter  for  a  bank,  a  railroad,  a 
telegraph  company,  or  a  college  would  differ  widely. 

§319.     Charter  Powers — General 

The  grant  of  a  charter  bestows  upon  a  corporation  all  the 
powers  properly  specified  in  the  application  for  a  charter.  In 
addition  to  these  specified  powers — which  are  usually  those 
necessary  to  conduct  the  business  or  enterprise  to  be  under- 
taken by  the  corporation — the  charter  confers  certain  general 


>  See  also  Chapter  L.     For  form  of  charter,  see  Chapter  CVI,  Form  54. 

38.5 


386  CORPORATIONS 

powers,  whether  specified  or  otherwise.    These  general  powers 
are  as  follows: 


To  sue  and  be  sued. 

To  use  a  seal. 

To  buy,  sell,  and  hold  property. 

To  appoint  directors,  officers,  and  agents. 

To  make  by-laws. 

To  dissolve  itself. 

To  do  all  things  necessary. 


7- 
These  are  discussed  in  order  in  the  following  sections: 

§320.     (i)  To  Sue  and  Be  Sued 

When  a  partnership  is  sued  each  partner  must  be  named 
separately  and  be  made  a  party  to  the  action.  A  corporation 
may  sue  or  be  sued  under  its  corporate  name  just  as  may 
an  individual.  No  mention  need  be  made  of  its  stockholders. 
A  summons  may  be  served  on  any  managing  officer,  on  any 
director,  or  on  an  agent  in  charge  of  the  corporate  affairs. 

§  321.     (2)  To  Use  a  Seal 

Formerly  the  seal  was  the  essential  feature  of  the  corporate 
signature.  Now  the  corporate  signature  may  be  affixed  by 
any  properly  authorized  agent  without  the  use  of  the  seal,  save 
in  those  cases  where  even  an  individual  must  use  a  seal,  as  in 
the  conveyance  of  real  estate  or  the  execution  of  a  bond. 

The  custody  of  the  seal  usually  rests  with  the  secretary 
of  the  corporation. 

§  322.     (3)  To  Buy,  Sell,  and  Hold  Property 

This  power  must  be  taken  with  some  qualifications.  The 
property  must  be  such  as  pertains  to  the  business  of  the  cor- 
poration and  such  as  it  is  permitted  to  hold  under  the  laws. 
In  some  states  the  ownership  of  land  by  corporations  is  re- 


THE  CHARTER  387 

stricted.  Also  in  many  states  a  corporation  may  not  hold 
shares  of  stock  in  another  corporation.  A  corporation  must 
dispose  of  property  taken  for  debt,  if  it  has  no  charter  right 
to  hold  that  kind  of  property. 

§323.     (4)  To  Appoint  Directors,  Officers,  and  Agents 

This  power  is  absolutely  necessary  as  the  corporation  can 
act  only  through  such'  representatives.  The  stockholders  at 
their  annual  meeting  elect  directors  who  have  charge  of  and 
manage  the  corporate  affairs.  These  directors  then  meet  and 
elect  a  president,  a  treasurer,  a  secretary,  and  such  other 
officers  as  may  be  desired.  Agents  may  be  appointed  by  the 
directors  or  by  the  officers,  when  authorized  thereto. 

§  324.     (5)  To  Make  By-Laws 

The  by-laws  are  adopted  by  the  stockholders.  They  are 
the  working  rules  of  the  corporation  and  provide  for  the 
details  of  its  operation.  The  by-laws  are  subordinate  to  the 
laws  of  the  state  and  to  the  charter  of  the  corporation,  and 
their  provisions  must  not  be  inconsistent  with  either.  Under 
this  limitation,  however,  the  by-laws  have  wide  scope. 

§  325.     (6)  To  Dissolve  Itself 

When  a  corporation  has  failed  in  its  object,  or  has  become 
unprofitable,  or  has  completed  its  intended  purpose,  or  has 
disposed  of  its  business  and  property,  its  dissolution  may  be- 
come desirable.  Formerly  the  unanimous  consent  of  all  the 
stockholders  was  generally  required  for  dissolution.  Now 
in  most  states  some  specified  majority  of  the  stockholders 
by  simple  statutory  proceedings  may  dissolve  the  corporation. 
In  such  case  the  assets  are  sold,  and,  after  payment  of  any 
corporate  debts,  any  remaining  funds  are  divided  pro  rata 
among  the  stockholders. 


388  CORPORATIONS 

§326.     (7)  To  Do  All  Things  Necessary 

A  corporation  organized  for  some  specified  purpose  has 
the  legal  right  to  make  all  contracts  and  do  all  proper  things 
necessary  to  carry  out  that  purpose.  For  instance,  a  corpora- 
tion organized  to  build  and  operate  a  factory  would  without 
special  authorization  thereto  have  the  right  to  buy  and  hold 
the  real  estate  required  for  the  erection  of  its  plant. 

§  327.     Charter  Powers — Special 

The  special  powers  of  a  corporation  are  those  specifically 
mentioned  in  its  charter  which,  if  not  so  mentioned,  it  would 
not  possess.  The  usual  purposes  for  which  corporations  are 
formed,  with  their  amplifications,  are  included  among  these, 
but  in  most  states  the  law  allows  many  further  powers  that 
add  much  to  the  value  of  the  corporate  system. 

Among  these  may  be  mentioned  provisions  as  to  the  issue 
of  preferred  and  other  special  stocks,  the  system  of  cumulative 
voting,  the  power  to  hold  stock  of  other  corporations,  etc. 
Also  restrictions  of  various  kinds  may  be  embodied  in  the 
charter,  such  as  limitations  on  salaries  to  be  paid  officers,  or 
restrictions  on  the  power  to  mortgage  the  corporate  property 
or  to  contract  indebtedness  generally. 

§328.     Things  Ultra  Vires 

An  individual  or  firm  may  do  anything  not  forbidden  by 
the  law.  A  corporation  may  do  only  those  things  expressly 
permitted  to  it  under  the  law.  All  other  things  are  beyond 
its  powers,  or  in  legal  parlance,  ultra  vires.  Contracts  not  yet 
carried  out  by  the  other  party,  involving  matters  ultra  vires, 
cannot  be  enforced  by  the  corporation;  but  if  these  other 
parties  to  a  contract  have  performed  their  part,  the  contract 
may  be  enforced  against  the  corporation — that  is,  a  corpora- 
tion cannot  evade  its  obligations  by  the  plea  of  ultra  vires. 
Directors  and  officers  may  make  themselves  personally  liable 


THE  CHARTER  389 

either  to  the  corporation,  to  its  stockholders,  or  to  third  per- 
sons, if  they  involve  the  corporation  in  transactions  of  this 
nature. 

§  329.     Amendment  of  Charter 

Any  corporate  right  or  privilege  that  might  have  been 
secured  in  the  original  charter  of  a  corporation  may,  in  most 
of  the  states,  be  secured  by  charter  amendment,  and  such 
amendment  may  be  made  at  any  time,  even  before  the  organi- 
zation of  the  corporation  is  completed. 

As  a  preliminary  step,  amendments  of  the  charter  usually 
require  the  assent  of  at  least  two-thirds  of  the  outstanding 
stock  of  the  corporation  in  the  manner  prescribed  by  law — 
usually  by  vote  at  a  regularly  called  meeting.  The  amend- 
ment so  authorized  is  then  as  a  rule  filed  in  the  same  offices 
and  with  the  same  formalities  as  the  original  charter,  becom- 
ing effective  as  soon  as  allowed  and  filed. 


Review  Questions 

1.  What  is  the  basic  agreement  that  forms  a  corporation?     Who 

are  the  parties  to  it?     Give  different  kinds  of  charters. 

2.  What  are  the  usual  corporate  powers?     Give  examples. 

3.  What  are  special  charter  powders? 

4.  What  are  things  ultra  vires f    What  is  the  effect  if  a  corpora- 

tion exceeds  its  powers? 

5.  Distinguish  between  acts  of  directors  resulting  in  personal  lia- 

bility and  such  as  are  merely  ultra  vires. 

6.  The  president  of  a  corporation  in  your  state  went  to  a  bank  in 

Chicago  and  requested  the  loan  on  his  note  of  $10,000  for 
his  personal  benefit.  The  bank  president  said  that  he  would 
make  the  loan  if  the  directors  of  the  borrower's  company 
would  authorize  the  borrower  to  indorse  it  in  the  name  of 
the  company.  They  did  so,  the  indorsement  was  made,  the 
bank  discounted  the  note,  and  paid  the  proceeds  to  the  maker. 
He  failed  to  pay  it;   proper  demand   was  made  and  notice 


390 


CORPORATIONS 


of  non-payment  given.     Is  the  indorsement  binding  on   the 
company?     Give  reasons  for  your  answer. 

7.  What  is  the  procedure  for  amending  a  charter  in  your  state? 

8.  If  a  corporation  to  secure  a  debt  took  property  that  its  charter 

did  not  authorize  it  to  hold,  what  should  it  do? 

9.  If  suit  were  brought  against  a  corporation,  upon  whom  would 

the  papers  be  served? 

10.  By  whom  are   directors   elected?     Who  choose  the   executive 

officers  ? 

11.  Could  a  railroad  company  operate  a  telegraph  line? 

12.  If  a  corporation  issues  stock  in  excess  of  its  authorization,  is 

the  excess  stock  valid? 


•  CHAPTER  L 

INCORPORATION^ 

§330.    Application  for  Incorporation 

In  former  days  a  grant  of  a  special  charter  would  be  made 
to  specified  persons,  authorizing  them  to  conduct  some  particu- 
lar enterprise  under  the  corporate  form.  Usually  these 
charters  conferred  some  franchise  or  special  privilege,  as  the 
right  to  erect  a  toll  bridge,  establish  a  bank,  construct  a  rail- 
road, or  build  a  dam. 

The  abuses  arising  from  this  method  of  granting  charters 
have  resulted  in  most  states  in  the  establishment  of  general 
laws  under  which  corporations  may  be  formed  for  any  legiti- 
mate purposes,  by  any  qualified  persons  upon  compliance  with 
prescribed  formalities.  In  some  few  states  special  charters  are 
still  granted  on  occasion. 

The  form  of  application  for  a  charter  under  these  general 
laws  is  usually  merely  a  copy  of  the  charter  desired. 

It  may  be  called  a  "certificate  of  incorporation,"  "articles 
of  association,"  or  other  similar  name.  It  sets  forth  the  names 
of  the  applicants  and  the  name,  purposes,  and  other  required 
details  of  the  projected  corporation.  It  usually  also  includes 
the  proposed  capital,  the  par  value  of  the  shares,  the  principal 
office  of  the  corporation,  its  duration,  the  number  and  names 
of  its  first  directors,  the  subscribers  to  its  stock  and  any 
special  provisions  that  are  desired.  The  charter  application 
when  allowed  becomes  itself  the  charter. 

It  is  executed  by  the  ncorporators,  and,  after  its  allowance 
by  the  Secretary  of  State,  is  filed  in  his  office.     It  must  also 


I  For  incorporation  forms,  see  Chapter  CVI,  Forms  53,  57. 


392  CORPORATIONS 

usually  be  filed  in  the  office  of  the  clerk  of  the  county  in  which 
the  corporation  is  domiciled  or  has  its  home.  If  the  proposed 
corporation  is  for  proper  purposes,  if  all  fees  have  been  paid, 
and  the  application  is  in  due  form,  it  is  accepted  and  filed  as 
a  matter  of  course  and  the  incorporation  is  accomplished. 

The  details  of  incorporation  as  given  are  the  simple  forms 
used  for  ordinary  business  corporations.  The  formalities  and 
requirements  for  organizing  a  public  utility  corporation  are 
more  complex  and  more  onerous. 

§331.    Incorporators 

The  parties  applying  for  a  charter  must  be  competent 
persons  of  full  age,  and  ordinarily  some  proportion  of  them 
must  be  citizens  of  the  state  in  which  the  application  for 
charter  is  filed.  Minors,  firms,  or  corporations,  and  generally 
persons  not  able  to  contract,  are  not  competent  parties,  though 
they  may  usually  hold  stock  after  the  corporation  is  formed. 
Persons  acting  in  a  representative  capacity  cannot  act  as  such 
in  incorporating  a  company.  The  minimum  number  of  ap- 
plicants is  in  most  states  three,  though  in  some  few  states 
five  are  required.  Each  incorporator  must  ordinarily  subscribe 
for  one  or  more  shares  of  stock  and  all  must  sign  and 
acknowledge  the  application. 

§  332.     Name  of  Corporation 

Names  like,  or  nearly  like,  those  of  corporations  already 
rightfully  doing  business  in  the  particular  state  may  not  be 
selected  as  the  corporate  name.  In  some  states  all  corporate 
names  must  begin  with  "The"  and  end  with  "Company."  In 
others  the  name  must  be  followed  by  "Limited"  or  "Incor- 
porated." In  many  states,  firms  may  become  incorporated 
under  the  partnership  name  without  change  or  addition  of 
any  kind. 


INCORPORATION  393 

§  333'     Purposes 

The  purposes  for  which  a  corporation  is  to  be  formed  must 
be  set  forth  in  the  application.  They  must  be  permitted  by 
the  laws  of  the  particular  state.  Ordinary  business  corpora- 
tions are  allowed  much  latitude  in  stating  their  purposes  and 
are  not  usually  confined  to  one  business  or  line  of  activity. 
(See  Chapter  LI.) 

§  334'     Capitalization 

The  capital  stock  of  the  proposed  corporation  must  be 
specified  in  the  application  and  may  be  changed  thereafter 
only  by  amendment  of  the  charter.    (See  §  349.) 

§  335-    Shares 

In  most  states  of  the  Union  the  par  value  of  shares  of  stock 
may  be  fixed  by  the  incorporators  at  discretion.  In  some  few 
states  there  are  general  restrictions,  as  in  New  York  where 
the  par  value  of  the  share  must  be  not  less  than  $5  nor  more 
than  $100.  In  New  York  and  some  other  states  shares  may 
also  be  issued  without  any  par  value. 

One  hundred  dollars  is  the  most  convenient  and  most 
generally  adopted  par  value  for  shares  of  stock.     (See  §  349.) 

§  336.    Location 

A  corporation  must  have  its  principal  office  in  the  state 
in  which  it  is  incorporated.  The  location  must  usually  be 
specified  in  the  application  for  its  charter. 

In  the  state  of  its  incorporation  the  company  is  a  "domes- 
tic" corporation.  Elsewhere  it  is  a  "foreign"  corporation.  In 
its  own  state  it  has  certain  legal  rights  as  an  incident  of  incor- 
poration. In  other  states  it  has  no  such  rights  except  as  a 
matter  of  courtesy  or  as  may  be  granted  there  by  legislation. 


394  CORPORATIONS 

§  337'    Duration 

In  some  states  the  duration  of  corporations  is-  limited  to 
some  fixed  maximum  as  twenty,  thirty,  or  fifty  years.  In 
most  states,  however,  while  a  corporation  may  be  limited  to 
any  term  specified  by  its  charter,  it  is  permissible  to  make  its 
duration  perpetual. 

§  338.    Number  of  Directors 

The  number  of  directors  of  the  corporation  must  in  most 
states  be  specified  in  the  charter  application.  The  minimum 
allowed  by  law  is  usually  three.     (See  §  371.) 

§  339>    Classification  of  Stock 

Under  the  laws  of  most  of  the  states,  stock  may  be  classi- 
fied in  various  ways.  The  customary  classification  is  into 
common  and  preferred  stock.  Another  frequent  classification 
is  that  of  voting  and  non-voting  stock.  Sometimes  stock  is 
classified  so  that  each  class  of  stock  elects  one  or  more  direc- 
tors.    (See  §  356.) 

§  340.     Cumulative  Voting 

The  cumulative  system  (see  §  367)  is  employed  only  in 
the  election  of  directors. 

§  341.     Execution  of  Certificate 

The  charter  application,  having  been  duly  made  out  in  con- 
formity with  the  laws  of  the  state  of  incorporation,  is  signed, 
usually  in  duplicate,  by  the  incorporators.  It  is  then  acknowl- 
edged before  some  officer  authorized  to  take  acknowledgments 
to  deeds,  and  is  ready  for  filing. 

§342.    Filing  and  Recording 

Under  the  usual  procedure,  the  duly  executed  application, 
accompanied  by  the  proper  fees,  is  sent  to  the  office  of  the 


INCORPORATION  395 

Secretary  of  State,  while  another  copy  is  filed  with  the  county 
clerk  of  the  county  in  which  the  proposed  corporation  is  to 
have  its  principal  office.  Each  state  has  its  own  minor  varia- 
tions in  procedure,  which  will  be  found  in  its  statute  law. 

In  New  York  the  state  fees  must  be  sent  to  the  State 
Treasurer.  When  these  fees  are  received,  the  Treasurer  certi- 
fies that  fact  to  the  Secretary  of  State,  who  will  not  file  the 
charter  until  this  certification  is  received.  In  New  Jersey  the 
application  is  filed  with  the  county  clerk  first,  and  a  copy 
certified  by  him  is  then  filed  with  the  Secretary  of  State.  In 
some  states,  the  application  must  receive  the  approval  of  the 
judge  of  a  specified  court  before  it  will  be  filed. 

If  the  application  for  charter  is  in  due  shape  and  all  fees 
are  paid,  it  is  accepted  and  filed  as  a  matter  of  course.  The 
application  becomes,  when  filed,  the  charter  of  the  corporation. 
The  existence  of  the  corporation  dates  from  such  filing. 

As  the  procedure  for  incorporation  varies  in  each  state, 
it  is  best  to  study  the  statutes  and  the  forms  prescribed  in 
the  reader's  own  state.  In  most  states  these  statutes  are 
published  in  a  pamphlet  and  the  blank  forms  are  usually  sent 
out  on  application  to  the  Secretary  of  State. 

§343.     De  Facto  Corporation 

Sometimes  an  attempted  incorporation  may  fail  and  then 
a  question  may  arise  as  to  the  liability  of  the  members.  The 
elements  of  a  de  facto  corporation  are : 

1.  A  general  law  under  which  the  corporation  could  be 

legally  formed. 

2.  A  bona  fide  attempt  to  comply  with  the  provisions 

of  that  law. 

3.  The  exercise  of  corporate  powers. 

When  these  elements  exist  the  liability  of  members  will 
be  the  same  as  if  the  incorporation  had  not  been  defective. 


396  CORPORATIONS 

Otherwise  the  members  will  be  liable  as  partners.     In  some  ( 
states  the  doctrine  oi  de  facto  corporations  is  not  recognized. 

§344.    Contracts  Prior  to  Incorporation 

When  contracts  are  entered  into  in  expectation  of  the 
formation  of  a  corporation  and  on  its  behalf,  the  status  of  the 
trustees  or  parties  in  charge,  if  the  corporation  fails  of  incor- 
poration, depends  upon  the  nature  and  condition  of  the  con- 
tract. A  subscription  to  stock  would  be  terminated,  and  if 
payment  had  been  made  thereon  to  a  trustee,  any  unexpended 
amount  might  be  reclaimed ;  and  if  the  trustee  were  to  blame 
for  the  failure  to  incorporate,  he  might  be  responsible  for  the 
portion  expended  as  well. 

Other  contracts,  if  clearly  made  on  behalf  of  the  proposed 
corporation,  would  in  most  cases  be  terminated.  If  not  clearly 
made  for  the  new  corporation,  the  parties  contracting  for  the 
corporation  might  be  held  to  specific  performance  or  for 
damages  for  non-performance.     (See  §  146.) 

If  the  incorporation  proceeds  without  misadventure,  such 
contracts  would  be  ratified  and  adopted  by  the  new  corpora- 
tion. The  promoters  usually  control  the  first  meetings  and 
look  out  for  this.  If  the  company  without  formal  adoption 
took  advantage  of  a  contract,  or  used  services  contracted  for 
by  promoters,  it  would  be  liable  for  a  fair  compensation. 


Review  Questions 

1.  What  is  the  usual  procedure  in  incorporating  a  company  in  your 

state?     Prepare  the  required   application    for   charter  of   a 
manufacturing  corporation. 

2.  May  persons  acting  in  a  representative  capacity  be  incorporated  ? 

Can  a  corporation  be  a  party  to  an  incorporation? 

3.  Where  must  the  principal  office  of  a  corporation  be?     How  is 

it  fixed? 

4.  How  may  stock  be  classified? 


INCORPORATION  397 

5.  How  is  the  application  for  a  charter  executed?     Where  is  it 

filed  in  your  state? 

6.  What  is  a  de  facto  corporation? 

7.  How  many  incorporators  are  required  in  your  state  to  organize 

a  business  or  a  manufacturing  corporation? 

8.  Why  are  shares  without  par  value  desired? 

9.  The  promoters  of  a  company  before  its  incorporation  employ 

an  accountant  to  prepare  the  prospectus,  which  the  company 
makes  use  of.     May  he  recover  for  his  services  against  the 


company 


10.  When  persons  associate  themselves  together  as  a  corporation 

and  the  corporation  is  defective  or  incomplete,  what  is  their 
position  as  against  the  creditors  of  the  corporation? 

11.  What  is  the  distinction  between  foreign  and  domestic  corpora- 

tions ? 


CHAPTER  LI 

BY-LAWS^ 

§  345.     Definition 

By-laws  are  the  more  permanent  rules  of  corporate  action 
as  distinguished  from  motions  and  resolutions,  which  usually 
apply  only  to  particular  occasions  and  special  matters. 

A  corporation  is  controlled:  (i)  by  the  corporation  laws 
of  the  state  in  which  it  is  domiciled,  (2)  by  the  provisions  of 
its  charter,  and  (3)  by  its  by-laws,  these  three  ranking  in  the 
order  given  as  to  authority.  Hence  any  by-law  that  does  not 
accord  with  the  statutes  of  the  state  and  also  with  the  provi- 
sions of  the  charter  of  the  particular  corporation  is  void. 

By-laws  are  enacted  by  the  stockholders  and  by  them  alone, 
unless,  by  statute,  by  charter  provision,  or  by  action  of  the 
stockholders  themselves,  such  power  has  been  delegated  en- 
tirely or  in  part  to  the  directors  of  the  corporation. 

By-laws  limiting  the  power  of  ofificers  to  make  contracts 
will  not  be  effective  against  one  who  contracts  with  the  cor- 
poration without  knowledge  of  those  by-laws.  The  officers, 
though,  would  make  themselves  liable  to  the  corporation  for 
any  damage  resulting  from  their  breach  of  duty. 

§  346.     Adoption 

A  corporation  is  not  compelled  to  adopt  by-laws.  Its 
operation  without  them  would,  however,  be  practically  im- 
possible. 

A  reasonably  complete  set  of  by-laws  Is  usually  adopted 
by  the  stockholders  at  their  first  meeting,  and  these  by-laws 

J  For   form   of   by-laws,   see  Chapter  CVI,   Form   55. 


BY-LAWS  399 

are  added  to,  amended,  or  repealed  from  time  to  time  there- 
after as  may  be  necessary. 

By-laws  should  be  carefully  drawn,  properly  adopted,  and 
accurately  recorded  in  the  minute  book  of  the  corporation. 
They  should  provide  fully  for  all  the  important  details  of 
corporate  procedure,  such  as  the  issuance  and  transfer  of 
stock,  the  meetings  of  the  stockholders  and  directors,  the 
election  of  directors  and  officers,  the  respective  duties  and 
responsibilities  devolving  upon  these,  and  the  care  and  manage- 
ment of  the  corporate  property  and  finance.  They  should  also 
include  the  more  important  provisions  of  the  charter  and  of 
the  statute  law  as  far  as  applicable.  This  is  done  in  order  to 
provide  a  convenient  and  accessible  memorandum  of  these 
provisions.  Without  this  they  might  be  overlooked  or  for- 
gotten. 

§  347.    Amendment 

The  by-laws  usually  prescribe  the  method  of  their  own 
repeal  or  amendment.  Unless  otherwise  provided  by  statute, 
charter,  or  by  proper  provision  in  the  by-laws  themselves,  these 
by-laws  may  always  be  repealed  or  amended,  either  in  whole 
or  in  part,  by  a  majority  vote  of  a  quorum  of  stockholders  at 
any  regular  meeting,  or  at  any  special  meeting  duly  called  for 
that  purpose.  The  directors  have  no  power  to  repeal  or  amend 
by-laws  under  any  circumstances  unless  such  power  is  ex- 
pressly given  them  by  the  laws  of  the  state  of  incorporation, 
by  the  charter  of  the  corporation,  or  by  its  by-laws. 

§  348.    Enforcement 

Direct  penalties  for  the  violation  or  non-observance  of 
by-laws  are  sometimes  provided.  These  usually  take  the  form 
of  fines.  Such  penalties  are,  as  a  rule,  unsatisfactory  and  very 
difficult  of  enforcement.  The  smaller  infractions  are  usually 
passed  over,  or  recurrence  is  prevented  by  the  substitution  of 


400  CORPORATIONS 

more  reliable  officials  at  the  next  election.  The  more  serious 
violations  bring  their  own  penalties  in  the  legal  liabilities  and 
entanglements  that  necessarily  follow.  Corporate  action  taken 
in  disregard  of  by-law  provisions  is,  for  that  reason,  not  only 
illegal  but  may  at  times  involve  the  directors  and  officers  con- 
cerned in  personal  liabilities. 


Review  Questions 

What  are  by-laws?  How  do  by-laws  rank  as  compared  with 
other  corporate  regulations?  Are  by-laws  binding  on  people 
who  do  business  with  corporations?    Give  reasons  for  answer. 

Who  adopt  or  amend  by-laws  in  your  state?  If  a  corporation 
adopted  a  set  of  by-laws  which  provided  that  any  amendment 
required  a  two-thirds  vote,  would  a  subsequent  amendment 
by  a  majority  be  good?    Give  reason  for  answer. 

How  are  by-laws  enforced? 


CHAPTER  LII 

STOCK^ 

» 

§  349.     Capital  Stock 

The  capitalization  or  capital  stock  of  a  corporation  is  the 
amount  of  stock  as  fixed  by  its  charter  which  the  corporation 
is  empowered  to  issue.  This  amount  can  be  changed  only 
by  amendment  of  the  charter.  This  cai)ital  stock  is  regarded 
as  divided  into  equal  shares,  termed  "shares  of  stock."  When 
by  purchase  or  otherwise  a  person  acquires  an  interest  in  the 
capital  stock,  he  becomes  a  stockholder  in  the  corporation,  and 
his  interest  is  expressed  in  these  shares  of  stock. 

The  par  or  face  value  of  shares  of  stock  is  fixed  by  the 
charter  of  the  particular  corporation,  and,  unless  expressly 
limited  by  statute,  may  be  placed  at  any  amount  desired  by  the 
incorporators.  This  par  value  can  be  changed  only  by  charter 
amendment.  One  hundred  dollars  is  the  most  common  par 
value  of  shares.  The  number  of  shares  owned  by  any  in- 
dividual gives  an  accurate  measure  of  his  interest  in  the 
corporation.  For  instance,  if  a  man  owns  ten  shares  of  the 
par  value  of  $ioo  each  in  a  corporation  with  a  capitalization 
of  $10,000,  all  of  which  is  issued,  he  owns  a  total  stock  in- 
terest of  one-tenth  of  the  entire  outstanding  capital  stock,  and 
therefore  has  an  undivided  one-tenth  interest  in  the  entire 
corporate  property  and  lousiness. 

The  par  value  and  the  actual  value  of  a  share  of  stock 
may  be  very  different.  A  hundred-dollar  share  of  stock  in  a 
prosperous  corporation  will  frequently  lie  worth  several  times 


'  For  form  of  subscription  list,  stock  certificate,  and  assignment  of  stock  certificate, 
see   Chapter  CVI,   Forms   53,   57. 

401 


402  CORPORATIONS 

that  amount,  while  in  an  unsuccessful  corporation  it  may  be 
worth  little  or  nothing.  In  either  case  the  par  value  remains 
the  same. 

§350.     Stock  Certificates 

Stock  certificates  are  issued  as  a  convenient  evidence  of 
the  stockholders'  interests  in  a  corporation,  and  every  stock- 
holder whose  stock  is  paid  for  has  a  right  to  such  a  certificate. 
These  certificates  state  the  number  of  shares  owned,  their  par 
value,  and  usually  any  other  material  facts  affecting  the  stock 
in  question,  as,  for  instance,  that  it  is  full-paid,  or  that  it  is 
preferred  stock.  These  certificates  of  stock  are  signed  by  the 
president  and  the  secretary,  or  the  president  and  the  treasurer 
of  the  corporation  and  are  sealed  with  the  corporate  seal. 
When  properly  issued,  they  are  conclusive  evidence  of  the 
ownership  of  the  stock  represented  by  them. 

The  stock  certificate,  as  already  stated,  is  merely  the  evi- 
dence of  ownership  of  stock  and  is  not  the  stock  itself.  The 
stock  of  a  corporation  usually  exists  before  stock  certificates 
are  issued  at  all,  and  may  be  bought  and  sold  by  proper  entries 
on  the  corporate  books. 

Old  stockholders  have  a  right  to  purchase  new  stock  pro 
rata  before  it  may  be  offered  to  outside  investors.  However, 
a  price  may  be  fixed,  not  less  than  par,  and  if  the  stockholders 
are  given  an  opportunity  to  take  stock  at  that  price  in  propor- 
tion to  their  holdings,  and  the  offer  is  not  accepted,  the  right 
is  lost,  and  the  stock  may  be  sold  to  others,  at  the  advanced 
price.  In  some  cases  subscription  scrip  that  can  be  sold  to 
others  is  issued  to  stockholders  in  proportion  to  their  holdings. 

Each  share  of  stock  usually  entitles  the  owner  of  record 
to  one  vote  in  all  proceedings  of  the  stockholders,  whether  as- 
sembled in  annual  or  special  meeting.  In  most  states,  by 
proper  charter  provision  the  voting  power  of  stock  may  be 
restricted,  or  stock  may  be  issued  without  voting  power.   Pre- 


STOCK  403 

ferred  stock  is  very  frequently  so  issued.  Unless  expressly 
denied  or  restricted  by  proper  provision,  all  stock  has  the  usual 
voting  power  and  this  right  may  be  exercised  by  the  owner  of 
record  in  person,  or,  usually,  by  proxy. 

§  351.    Capital  Stock  vs.  Capital 

The  "capital  stock"  or  capitalization  of  a  corporation 
should  be  very  clearly  distinguished  from  its  "capital." 

The  capital  stock  is  the  total  amount  of  stock  the  corpora- 
tion is  authorized  by  its  charter  to  issue.  This  amount  is  fixed 
in  the  first  place  by  the  parties  organizing  the  corporation — 
who  are  termed  the  incorporators — and,  once  accepted  and 
authorized  by  the  state,  may  be  changed  only  by  formal  amend- 
ment of  the  charter. 

The  capital,  on  the  other  hand,  is  the  net  actual  amount  of 
property  owned  by  the  corporation,  that  is,  the  excess  of  its 
assets  over  its  liabilities.  It  is  obvious  that  the  value  of  these 
assets  is  liable  to  change  with  the  fluctuations  of  the  business  or 
from  other  causes.  The  capital  stock  of  the  corporation  and  its 
capital,  therefore,  even  though  equal  at  first,  may  and  fre- 
quently do  differ  greatly  in  amount.  For  instance,  the  capital 
stock  of  the  Chemical  Bank  of  New  York  City  is  $3,000,000 
while  its  capital  is  over  $7,500,000. 

§  352.    Unissued  and  Issued  Stock 

Unissued  stock  is  not  an  asset  of  the  company  but  is  merely 
an  unexercised  right  to  issue  stock  when  and  as  subscriptions 
for  it  are  accepted. 

It  usually  represents  excess  capitalization.  For  instance,  a 
corporation  organized  to  take  over  property  worth  $20,000 
might  perhaps  be  capitalized  at  $25,000  with  the  idea  of  selling 
the  excess  stock  at  some  future  time  to  raise  working  capital. 

Issued  and  outstanding  stock  is  stock  which  has  been  issued 
for  cash,  property,  labor,  services,  or  other  values,  or  which 


404  CORPORATIONS 

has  been  subscribed  for  and  the  subscriptions  accepted  by  the 
company.  Such  stock  is  issued  stock  and  the  subscribers  or 
purchasers  are  stockholders  of  the  company,  even  though  the 
actual  certificates  by  which  this  stock  is  represented  may  not 
have  been  issued. 

Section  55  of  the  Stock  Corporation  Law  in  New  York 
State  provides  that: 

No  corporation  shall  issue  either  stock  or  bonds  except 
for  money,  labor  done,  or  property  actually  received  for  the 
use  and  lawful  purposes  of  such  corporation. 

§353.     Full-Paid  Stock 

In  most  of  the  states,  payment  for  stock  may  be  made  in 
anything  of  value.  If  the  corporation  has  received  the  full 
face  value  for  issued  stock  in  cash  or  in  any  other  form  of 
payment  permitted  by  law,  such  stock  is  termed  full-paid, 
and  its  certificates  should  be  marked  "Full-Paid"  in  order  to 
indicate  this  fact.  After  stock  has  once  been  issued  for  full 
value,  it  may  be  sold  at  less  than  par  without  involving  the 
purchaser  in  any  liability  for  the  difiference. 

If  the  corporation  has  not  received  the  full  face  value  for 
issued  stock,  the  stock  is  but  partly  paid,  and  the  immediate 
purchaser  of,  or  subscriber  to,  such  stock  may  usually  be  held 
liable  for  the  amount  necessary  to  render  it  full-paid.  This 
liability  may  be  enforced  either  by  the  corporation,  or,  in  event 
of  its  insolvency,  by  any  creditor  of  the  corporation. 

Stock  certificates  issued  as  full-paid  when  they  are  not 
full-paid  will  not  protect  stockholders,  who  knowingly  sub- 
scribe for  or  buy  such  stock,  from  liability  to  creditors  in 
case  of  insolvency.  But  an  innocent  purchaser  for  value  who 
buys  in  the  open  market  is  not  liable  either  to  the  corporation 
or  its  creditors. 

Watered  stock  is  stock  for  which  the  corporation  has  not 


STOCK  40s 

received  full  payment  in  cash,  services,  or  property.  Watered 
stock  is  usually  created  by  the  issuance  of  stock  in  payment  for 
property  or  services  which  have  been  overvalued;  sometimes 
also  it  is  created  by  the  issue  of  stock  insufficiently  supported 
by  the  corporate  property,  as  for  instance,  in  cases  of  unwar- 
ranted stock  dividends. 

§  354-     No  Par  Value  Stock 

In  some  states,  as  in  New  York,  stock  may  be  issued  having 
no  par  value.  Its  value  is  the  market  rate.  Here  the  stock  is 
full-paid  when  it  is  sold  at  whatever  can  he  obtained  for  it  in 
the  market,  and  there  is  no  further  liability. 

§355.     Common  Stock 

Common  stock  is  the  general  or  ordinary  stock  of  a  cor- 
poration, with  neither  special  privileges  nor  restrictions.  If 
any  portion  of  the  stock  is  given  special  privileges  or  restric- 
tions, that  portion  is  thereby  removed  from  the  class  of  com- 
mon stock  and  the  remainder  constitutes  common  stock.  Any 
statements  made  concerning  stock,  when  the  class  is  not  speci- 
fied, are  usually  understood  to  apply  to  the  common  stock. 

Non-participating  stock  is  stock  sharing  in  all  dividends 
but  giving  the  owner  no  voting  right. 

§356.     Preferred  Stock 

Preferred  stock,  as  the  term  is  usually  employed,  is  that 
which  has  some  preference  as  to  dividends  or  assets  over  other 
stock  of  the  same  corporation.  This  preference  is  usually 
secured  to  it  by  special  provisions  in  the  certificate  of  incor- 
poration, though  in  some  states  this  may  be  attained  by  by-law 
provision. 

Preferred  stock  may  be  either  cumulative  or  non-cumu- 
lative as  to  dividends.     Non-cumulative  preferred  stock  must 


4o6  CORPORATIONS 

receive  its  preferred  dividend  for  the  current  year  before  any 
dividend  is  paid  the  common  stock,  but  if  in  any  year  its 
dividend  fails  or  is  only  partly  paid  it  loses  the  unpaid  amount. 
If  the  dividends  on  cumulative  preferred  stock  are  not  paid 
in  any  year,  or  years,  or  are  but  partially  paid,  the  amounts 
unpaid  go  over,  or  cumulate,  and  must  be  satisfied  before 
the  common  stock  receives  anything.  They  remain  a  charge 
against  the  profits  of  the  company  until  paid  in  full. 

It  is  usually  provided  that  preferred  dividends  shall  be  paid 
in  full  before  the  common  stock  receives  any  dividend.  Unless 
otherwise  expressly  provided,  after  the  preferred  dividends  are 
paid  in  any  year,  the  common  stock  receives  an  equal  dividend 
if  the  profits  are  sufficient,  and  both  kinds  of  stock  then  share 
alike  in  any  further  dividends  declared  in  that  year.  It  is 
sometimes  provided  that,  after  the  preference  dividends  are 
paid,  the  preferred  stock  shall  share  equally  in  all  further 
profits  with  the  common  stock.  Preferred  stock  is  sometimes 
limited  to  its  preferred  dividend  and  does  not  participate  at 
all  in  any  further  dividends. 

It  is  often  provided  that  in  case  of  dissolution  preferred 
stock  shall  be  satisfied  out  of  any  assets  of  the  company  before 
the  common  stock  receives  anything.  If  this  provision  is  not 
made,  either  by  statute  or  by  charter,  the  preferred  stock  in 
any  liquidation  of  the  corporation  will  first  receive  any  divi- 
dends then  due,  but  thereafter  will  fare  the  same  as  common 
stock. 

Preferred  dividends  may  be  paid  only  from  profits.  If 
there  are  no  profits,  or  if  the  profits  are  needed  for  purposes 
of  the  business,  the  dividends  to  preferred  stock  are  either 
passed  entirely  or  cumulated  until  profits  are  made.  Unlike 
a  bond,  preferred  stock  is  not  a  debt  or  liability  of  the  cor- 
poration. Its  owners  are  stockholders  and  not  creditors,  and 
failure  of  dividends  gives  no  cause  of  action  against  the  com- 
pany or  its  directors. 


STOCK  407 

§  357-    Treasury  Stock 

Treasury  stock,  in  the  better  use  of  the  term,  is  stock  which 
has  been  issued  for  value  and  has  by  gift  or  purchase  come 
back  into  the  possession  of  the  company.  It  differs  from  un- 
issued stock  in  the  fact  that  it  may  be  sold  below  par  without 
involving  the  purchaser  in  any  liability  for  the  unpaid  balance. 
So  long  as  the  treasury  stock  is  held  by  the  company,  it  can 
neither  vote  nor  draw  dividends. 

§  358.     Lost  Certificates 

A  stockholder's  rights  are  not  affected  by  the  loss  or  de- 
struction of  his  stock  certificate.  Its  absence  may  involve 
much  inconvenience,  more  particularly  if  the  stock  is  to  be 
sold.  The  directors  may,  in  their  discretion,  provide  for  the 
issue  of  a  duplicate  subject  to  the  by-laws,  which  usually 
provide  that  a  bond  must  be  required. 

If  a  certificate  is  lost  the  secretary  of  the  company  should 
be  notified  promptly,  as  otherwise  the  stock  certificate  might 
be  presented  under  circumstances  which  would  justify  him  in 
making  any  desired  transfer.  After  notification  he  would 
make  such  a  transfer  only  by  direction  of  the  board. 

§359.     How  Transferred 

Stock  certificates  usually  have  a  blank  form  of  transfer 
printed  on  the  back.  If  this  is  simply  signed,  the  stock  may 
be  transferred  to  anyone,  and  he  will  have  a  right  to  obtain  a 
certificate  made  out  to  himself  by  surrendering  the  indorsed 
certificate  to  the  corporation.  If  the  name  of  the  person  to 
whom  it  is  transferred  is  inserted,  only  that  person  has  a  right 
to  the  stock  and  to  the  new  certificate. 

A  Uniform  Stock  Transfer  Act  is  now  in  force  in  four- 
teen states  and  territories  and  governs  the  method  of  trans- 
ferring stock  and  the  rights  of  transferee  and  transferor. 
The  states  which  have  accepted  this  act  are: 


4o8  CORPORATIONS 

Connecticut  New  York 

Illinois  Ohio 

Louisiana  Pennsylvania 

Maryland  Rhode  Island 

Massachusetts  Tennessee 

Michigan  Wisconsin 
New  Jersey 

and  the  territory  of  Alaska 


Review  Questions 

1.  What  determines  the  amount  of  stock  a  corporation  may  issue? 

What  is  the  par  value  of  stock?  What  is  the  actual  value? 
What  fixes  the  actual  value? 

2.  What  is  a  stock  certificate?     If  a  "close"  corporation,  that  is, 

a  corporation  with  a  small  harmonious  group  of  stockholders, 
decided  not  to  issue  certificates,  what  would  be  the  efifect? 

3.  When  the  capital  of  a  corporation  is  increased,  what  persons 

have  a  prior  right  to  subscribe  for  the  new  stock,  and  in  what 
proportions?  May  such  right  be  made  negotiable,  and  if  so, 
how? 

4.  What   is   the   difference   between   the    "capital    stock"   and   the 

"capital"  of  a  corporation  ? 

5.  For  what  kinds  of  property  may  a  corporation  under  the  laws 

of  your  state  issue  its  capital  stock  in  payment?  Explain 
fully.  How  are  directors  liable  if  they  allow  subscribers  to 
stock  to  pay  some  instalments  with  notes? 

6.  Stock  certificates  are  issued  to  the  original  subscribers  bearing 

the  printed  words  "fully  paid  and  non-assessable,"  when  in 
fact  they  were  only  partly  paid  for ;  later  the  stock  is  sold  and 
assigned  to  a  purchaser  without  notice  of  the  fact  that  it 
is  not  paid  for  in  full.  What  remedy  has  a  creditor  or  the 
corporation  against  the  original  subscriber  and  against  the 
transferee  ? 

7.  What  is  the  object  of  "no  par  value  stock"? 

8.  What  is  common  stock?    Define  non-participating  stock.    What 

is  preferred  stock?    Is  preferred  stock  a  debt  of  the  corpora- 


STOCK  409 

tion?    Why  do  investors  object  to  non-cumulative  preferred 

stock  ? 
9.     Have  preferred  shareholders  a  right  to  recover  when  dividend 

is  earned  but  not  declared  ?    In  event  of  insolvency  can  a  holder 

of    preferred    stock    claim    payment    for    par    value    before 

creditors? 
ID.     Which   is   the   safer   investment,   preferred   or  common  stock? 

Why? 

11.  Why  is  common  stock  sometimes  more  valuable  than  preferred 

stock  ? 

12.  What  is  treasury  stock?    How  does  it  differ  from  unissued  stock? 

13.  H  a  stock  certificate  is  lost,  what  should  be  done? 

14.  How  is  stock  transferred? 


CHAPTER  LIII 

STOCKHOLDERS  AND  THEIR  MEETINGS^ 

§  360.     Incorporators 

Incorporators  are  the  persons  who  sign  the  certificate  of 
incorporation.  They  must  usually  be  subscribers  for  stock  and 
later  become  stockholders.  It  is  the  incorporators  who  draw 
up  the  application  and  make  the  charter  provisions.  After  the 
charter  has  been  accepted,  those  who  have  subscribed  for  stock 
become  stockholders  and  these  elect  the  directors.  [(StQ  §  331.) 

§  361.    What  Constitutes  a  Stockholder 

The  stockholders  of  a  corporation  are  those  who  actually 
hold  its  stock,  or  who  have  subscribed  for  its  stock  and  have 
had  their  subscriptions  duly  accepted  by  the  corporation.  A 
"stockholder  of  record"  is  one  whose  ownership  of  stock  is 
duly  recorded  upon  the  books  of  the  corporation. 

When  outstanding  stock  is  purchased,  the  transfer  must  be 
entered  on  the  books  of  the  company  before  the  purchaser  be- 
comes a  stockholder  of  record,  entitled  to  vote,  to  share  in 
dividends,  and  to  receive  a  certificate  of  stock  in  his  own  name. 
Until  that  time  he  is  the  equitable  owner  of  the  3tock,  but  is 
not  known  or  recognized  in  any  way  as  a  stockholder. 

§362.    Rights  of  Stockholders 

The  individual  stockholder  has  but  little  part  in  the  active 
management  of  the  corporation. 

The  rights  of  holders  of  common  stock  may  be  stated  as 
follows : 


*  For  form  of  minutea  of  stockholders'  meetings,  see  Chapter  CVII,  Form  59. 

410 


STOCKHOLDERS  AND  THEIR  MEETINGS  411 

1.  To  be  notified  of,  and  to  participate  in,  all  stock- 

holders' meetings,  in  person  or  by  proxy,  and  to 
cast  one  vote  for  each  share  of  stock  held. 

2.  To  vote  in  the  election  of  directors  at  the  annual 

meeting  each  year,  and  upon  any  amendment  of 
the  by-laws  or  other  general  matters  brought  be- 
fore the  meeting. 

3.  To  share,  in  proportion  to  the  amount  of  stock 

owned,  in  all  dividends  declared  on  the  common 
stock. 

4.  In  event  of  the  dissolution  of  the  corporation,  to 

share  in  like  proportion  in  any  assets  remaining 
after  all  the  corporate  debts  and  obligations  have 
been  paid. 

5.  To  inspect  the  corporate  books  and  accounts. 

It  should  be  said,  however,  that  this  last  right  has  been 
so  restricted  in  practice  as  to  amount  to  little  more  than  the 
right  to  inspect  the  list  of  holders  of  stock  as  shown  by  the 
stock  ledger. 

The  remedy  of  a  stockholder  denied  access  to  the  books 
would  be  by  writ  of  mandamus.  Theoretically,  the  holder  of 
a  single  share  may  enforce  this  right  of  inspection,  but  prac- 
tically the  courts  would  hesitate  to  act  where  the  interest  was 
small.  To  inspect  the  books  of  a  large  corporation  is  a  serious 
interference  with  business  and  the  courts  would  not  allow 
inspection  except  for  weighty  reasons. 

Holders  of  preferred  stock  have  the  same  rights,  except  as 
these  may  have  been  extended  or  restricted  by  the  conditions 
under  which  the  stock  was  issued. 

§  363.    Powers  of  Stockholders 

The  powers  of  the  stockholders  may  be  summarized  as 
follows: 


412  CORPORATIONS 

1.  Adoption  or  amendment  of  by-laws. 

2.  Election  of  directors. 

3.  Amendment  of  the  charter,     (See  §  329.) 

4.  Dissolution  of  the  company. 

5.  Sale  of  the  entire  assets  of  the  company. 

6.  The   exercise   of   any   specially   conferred   charter 

powers. 

The  board  of  directors  is  the  sole  managing  and  controlling 
authority  of  the  corporation.  The  stockholders  make  the  by- 
laws by  which  the  directors  are  controlled,  and  elect  the  direc- 
tors by  whom  the  corporate  afifairs  are  conducted,  but  beyond 
this  they  do  not  interfere  in  any  way  with  the  transaction  of 
the  corporate  business  or  the  management  of  the  corporate 
property.  All  this  rests  with  the  board.  Nor  can  the  stock- 
holders act  directly  for  the  corporation.  A  contract  signed  by 
every  stockholder  would  not  be  the  contract  of  the  corporation 
and  would  not  bind  the  corporation,  unless  also  signed  by  its 
proper  officers  or  otherwise  formally  accepted  by  its  directors. 

§  364.     Liabilities  of  Stockholders 

A  stockholder  is  liable  to  the  company  or  to  its  creditors 
for  any  instalments  remaining  unpaid  upon  stock  subscribed 
for  by  him.  He  may  also  be  liable  to  creditors  on  any  stock 
held  by  him  which  is  not  full-paid.  Should  dividends  be  paid 
from  capital  instead  of  from  profits,  stockholders  are  liable  to 
corporate  creditors  for  any  amount  so  received  by  them. 

Also  stockholders  of  national  banks  and  of  most  state 
banks  and  trust  companies  are  held  liable  in  case  of  the  in- 
solvency of  their  institutions,  for  an  amount  equal  to  their 
original  subscriptions. 

As  a  rule,  however,  in  the  ordinary  business  corporation 
the  holder  of  full-paid  stock  is  in  no  danger  of  losing  any- 
thing more  through  corporate  failure  or  insolvency  than  the 
amount  he  has  actually  invested  in  his  stock. 


STOCKHOLDERS  AND  THEIR  MEETINGS  413 

§365.     Stockholders'  Meetings 

The  annual  meeting  is  usually  the  only  regular  meeting  of 
stockholders.  It  must  be  held  in  the  state  in  which  the  com- 
pany is  incorporated,  unless  the  laws  of  such  state  expressly 
provide  otherwise,  and  it  is  usually  required  that  this 
annual  meeting  be  held  in  the  principal  office  of  the  cor- 
poration. 

At  the  annual  meeting  the  directors  for  the  ensuing  year 
are  elected,  the  reports  of  the  officers  are  presented,  any  amend- 
ments to  the  by-laws  may  be  submitted  and  acted  upon,  and 
any  affairs  of  the  company  requiring  the  action  or  attention  of 
the  stockholders  may  be  presented  for  consideration.  If  any 
sweeping  change  in  the  business  or  policy  of  the  company  is 
desirable,  it  is  usually  authorized  by  action  of  the  stockholders 
at  this  meeting. 

If  action  by  the  stockholders  is  necessary  in  the  interim 
between  the  annual  meetings,  a  special  meeting  may  be  called 
by  resolution  of  the  directors,  or  in  any  other  way  that  the 
by-laws  may  prescribe  or  permit.  This  call  is  followed  by  a 
notice  to  the  stockholders,  giving  the  necessary  details  of  the 
meeting  which  is  to  be  held.  In  the  case  of  a  special  meet- 
ing, both  call  and  notice  should  state  the  purpose  of  the 
meeting. 

§  366.     Quorum 

The  quorum  at  stockholders'  meetings  should  be  prescribed 
in  the  by-laws.  The  usual  provision  requires  the  presence  of 
a  majority  of  the  outstanding  stock  in  order  to  transact  busi- 
ness. When  a  quorum  is  present,  a  majority  of  this  quorum 
has  power  to  decide  any  question  that  is  brought  before  the 
meeting,  unless  it  should  be  a  special  matter  requiring  a  two- 
thirds  or  other  larger  vote  to  pass.  Where  it  is  not  otherwise 
prescribed  the  common  law  rule  is  that  those  in  attendance 
will  constitute  a  quorum. 


414  CORPORATIONS 

§  367.     Voting 

Only  stockholders  of  record  are  entitled  to  vote  at  annual 
and  special  meetings  of  the  stockholders.  Each  stockholder  of 
record  is  entitled  to  one  vote  for  each  share  of  stock  held  in 
his  name.  That  is,  if  five  directors  are  to  be  elected,  the  holder 
of  one  share  may  cast  one  vote  for  each  of  these.  The  holder 
of  ten  shares  may  cast  ten  for  each  and  so  on. 

Under  the  cumulative  system  of  voting,  which  is  designed 
to  secure  for  the  minority  a  representation  on  the  board,  the 
holder  of  one  share  still  casts  one  vote  for  each  director  to 
be  elected,  but  he  may  cast  all  five  votes — if  five  directors  are 
to  be  elected — for  any  one  candidate  or  may  distribute  them 
among  the  five  as  he  sees  fit. 

Voting  at  elections  of  directors  is  usually  by  ballot. 

§  368.     Voting  Trusts 

It  is  frequently  necessary  or  important  that  the  agreed 
management  of  a  corporation  be  preserved  consecutively  for  a 
term  of  years.  This  may  be  for  the  protection  of  minority 
or  special  interests  or  other  valid  reasons.  In  such  a  case  a 
voting  trust — sometimes  called  a  "stock  pool" — is  the  usual 
means  by  which  this  is  secured. 

This  arrangement  provides  that  sufficient  stock  to  insure 
the  desired  end  be  placed  in  the  hands  of  trustees  for  a  certain 
period  of  time  with  definite  instructions  as  to  the  way  in  which 
this  stock  shall  be  voted.  A  voting  trust  applies  only  to  the 
stock  of  a  single  corporation,  and  must  be  distinguished  from 
the  attempts  which  were  made  to  combine  a  number  of  cor- 
porations under  one  trust  management.  This  latter  system 
was  used  to  form  combinations  in  restraint  of  trade,  and  on 
that  account  has  been  prohibited. 

New  York  and  Maryland  are  the  only  states  in  the  Union 
in  which  the  voting  trust  is  expressly  sanctioned  by  statute, 
although  in  New  Jersey,  Massachusetts,  CaHfomia,  Alabama, 


STOCKHOLDERS  AND  THEIR  MEETINGS  415 

and  some  other  states  the  courts  have  rendered  decisions  favor- 
ing arrangements  of  this  kind  and  intimating  that  where  the 
trust  was  for  a  proper  purpose  and  for  a  reasonable  time,  and 
did  not  contemplate  any  advantage  from  which  other  stock- 
holders of  the  same  corporation  were  excluded,  it  was  not 
contrary  to  any  principle  of  law  or  equity. 

Any  voting  trust  formed  to  promote  a  monopoly,  or  to 
dominate  the  corporation  in  the  interests  of  another  corpora- 
tion, or  to  deprive  other  stockholders  of  their  rightful  powers, 
would  undoubtedly  be  held  illegal. 

§  369.     Proxies 

Any  stockholder  entitled  to  vote  at  a  stockholders'  meeting 
may  usually  give  a  proxy  (a  power  of  attorney)  empowering 
some  other  party  to  attend  stockholders'  meetings  as  his  rep- 
resentative and  vote  his  stock  in  his  stead.  ( See  Chapter  CII, 
Forms  31,  33.)  In  New  York  a  proxy  is  good  for  any 
definite  period  not  exceeding  eleven  months.  In  Pennsylvania  a 
proxy  is  not  good  after  two  months.  A  proxy-holder  need 
not  be  a  shareholder.  The  inspectors  of  election  have  power 
to  determine  the  genuineness  of  any  proxy. 


Review  Questions     . 

1.  What  constitutes  a  man  a  stockholder?    What  rights  have  stock- 

holders ? 

2.  If  a  stockholder  were  denied  access  to  the  books  what  could 

he  do?    Could  the  holder  of  a  single  share  enforce  inspection 
of  the  books? 

3.  What  is  the  managing  authority  of  a  corporation  ?    What  power 

has  a  stockholder?     What  power  have  the  stockholders? 

4.  What  right,  if  any,  in  your  state,  has  a  stockholder  to  demand 

a  financial  statement?     Are  stockholders  in  your  state  liable 
for  wages  of  employees  if  the  corporation  becomes  insolvent? 


41 6  CORPORATIONS 

5.  If  a  stockholder  owned  more  than  one-half  of  the  stock,  could 

he  bind  the  corporation  by  a  contract? 

6.  What  are  the  liabilities  of  a  stockholder?    What  is  the  liability 

of  a  stockholder  in  a  national  bank? 

7.  Where  should  the  annual  stockholders'  meeting  be  held?     What 

is  the  usual  rule  as  to  quorum? 

8.  Explain  the  operation  and  advantage  of  cumulative  voting? 

9.  What  is  a  voting  trust?    What  can  voting  trusts  do  legally? 

10.  Must  a  proxy-holder  be  a  stockholder? 

11.  When  does  a  proxy  which  does  not  specify  period,  become  in 

your  state  invalid  ? 

12.  Who  has  authority  to  determine  the  genuineness  of  proxies? 


CHAPTER  LIV 

DIRECTORS  AND  OFFICERS* 

§  370,     Status  and  Functions  of  Directors 

The  board  of  directors,  elected  by  the  stockholders,  has 
the  entire  management  of  the  corporate  affairs. 

The  directors  of  a  corporation  are  held  to  be  its  agents, 
and,  in  a  measure,  trustees  for  the  stockholders.  They  are 
responsible  for  its  proper  management. 

§371.     Number  and  Authority 

In  most  of  the  states  there  must  be  at  least  three  directors. 
The  maximum  number  is  not  usually  designated.  For  all 
ordinary  corporations  a  small  board  is  most  convenient,  and 
as  a  rule  most  effective. 

When  the  board  is  unwieldy  or  difficult  to  assemble,  the 
actual  administration  of  the  corporate  affairs  is  usually  dele- 
gated to  an  executive  committee  composed  of  from  three  to 
five  members  of  the  board. 

The  board  elects  the  corporate  officers,  appoints  such  other 
agents  as  may  be  necessary,  and  has  entire  charge  of  the  prop- 
erty, interests,  business,  and  transactions  of  the  company.  The 
board  of  directors  is  the  embodied  corporate  authority. 

The  directors  can  only  act  collectively  and  in  a  regular 
meeting  or  in  a  duly  assembled  special  meeting.  A  single 
director,  unless  authorized  thereto  by  resolution  of  the  board, 
or  specially  empowered  in  some  other  way,  has  no  standing  in 
corporate  matters  above  that  of  any  other  stockholder. 


'  For   forms   of   calls,    notices,    minutes,   etc.,    of   directors'    meetings,    see   Chapter 
CVII,    Forms    58,    60,   62,    65. 


4l8  CORPORATIONS 

§  372.     Liabilities 

Directors  are  liable  in  the  same  manner  as  trustees  for  any 
wrongdoing;  also  for  any  neglect  that  results  in  loss  to  the 
corporation.  For  instance,  they  are  liable  if  they  issue  stock 
as  full-paid  which  is  not  full-paid,  or  pay  dividends  out  of  the 
capital  of  the  company  when  there  are  no  profits,  or  otherwise 
abuse  their  power. 

Contracts  between  directors  and  the  corporation  are  gener- 
ally held  by  the  courts  to  be  voidable  but  are  presumptively 
valid.  They  may  be  voided  by  the  corporation  if  any  element 
of  unfairness  is  involved.  Contracts  of  this  kind  will  always 
however,  be  more  carefully  scrutinized  than  ordinary  con- 
tracts, and  their  validity  may  rest  on  the  circumstances  under 
^yhich  the  contract  was  made. 

In  a  case  of  a  threatened  breach  of  trust  by  the  directors 
or  officers  of  a  corporation,  an  injunction  may  be  asked  by  a 
stockholder  or  stockholders  to  prevent  this  and  the  stock- 
holder's rights  in  this  respect  are  not  affected  by  the  amount 
of  his  holdings.  The  same  action  may  be  taken  by  a  director 
to  remedy  the  breaches  of  his  codirectors. 

Creditors  are  not  usually  given  any  rights  to  interfere  in 
the  management  of  a  corporation  until  they  have  obtained 
judgment  and  had  an  execution  returned  unsatisfied. 

"The  creditors  of  a  corporation  have  no  right,  either  at 
law  or  equity,  merely  because  they  are  creditors,  to  interfere 
in  the  management,  or  to  go  into  a  court  of  equity  to  restrain 
it  from  making  contracts  or  disposing  of  property,  unless 
there  is  fraud  or  breach  of  trust  to  give  the  court  of  equity 
jurisdiction."  ^ 

A  corporation  where  it  is  being  pressed  for  payment  of 
debts  may  make  an  aissignment  for  the  benefit  of  creditors. 


'Wither  v.  Lynde,  49  Ga.  290;  19  Am.  Rep.  645.  Thomas  v.  Sweet,  37  Kan.  183. 
Stewart  v.  Lehigh  Valley  R.  R.  Co.,  38  N.  J.  L.  55.  Tompkins,  Summary  of  Law  of 
Private   Corporations. 


DIRECTORS  AND  OFFICERS  419 

§373-     Qualifications 

Most  of  the  states  require  that  directors  shall  be  stock- 
holders of  the  company;  also,  usually,  that  one  member  of 
the  board  shall  be  a  resident  of  the  state  of  incorporation. 
In  some  of  the  states  the  stockholding  requirement  may  be 
waived  by  provision  in  the  charter  or  by-laws. 

§374.     Vacancies  and  Removal  of  Directors 

A  board  of  directors  may  continue  to  act  though  there  be 
vacancies,  provided  sufficient  members  remain  and  are  present 
to  make  up  a  quorum.  Vacancies  should,  however,  be  filled 
as  they  occur,  and  authority  to  do  this  should  be  conferred 
on  the  board  by  the  by-laws.  The  board  does  not  possess  this 
power  unless  it  is  specifically  given. 

Directors  cannot  be  removed,  either  by  the  other  directors 
or  by  the  stockholders,  unless  such  power  of  removal  is  ex- 
pressly given  by  the  certificate  of  incorporation,  the  by-laws, 
or  the  statutes  of  the  state. 

§  375'    Regular  Meetings 

The  times  and  places  for  regular  meetings  of  the  directors 
are  fixed  by  the  by-laws.  Monthly  meetings  are  generally 
prescribed.  In  a  small  company  one  regular  meeting  a  year 
may  suffice.  Should  action  of  the  board  prove  necessary  in 
the  interim,  special  meetings  may  be  readily  called,  or  be  held 
by  consent  whenever  the  occasion  arises. 

§  376.    Special  Meetings 

The  by-laws  should  clearly  prescribe  the  method  by  which 
special  meetings  of  the  board  are  to  be  called.  Usually  it  is 
provided  that  the  president  or  two  or  more  of  the  directors 
may  call  such  meetings.  The  call  must  be  followed  by  a  notice 
to  each  director.    Calls  for  special  meetings  must  specify  the 


4ao  CORPORATIONS 

time,  the  place,  and  the  business  to  be  transacted,  these  details 
must  be  repeated  in  the  notice,  and  no  other  business  than  that 
so  specified  may  be  transacted  at  that  meeting. 

§  377-     Quorum 

A  majority  of  the  whole  board  is  usually  necessary  to  con- 
stitute a  quorum.  A  majority  of  the  prescribed  quorum  de- 
cides the  action  of  the  board.  Unless  regulated  by  statute,  the 
charter  or  by-laws  may  prescribe  the  number  necessary  to  form 
a  quorum. 

Directors  cannot  give  proxies  authorizing  others  to  rep- 
resent them  and  vote  for  them  at  directors'  meetings.  The 
directors  occupy  a  position  of  trust  and  they  cannot  as  in- 
dividuals delegate  to  others  the  trust  vested  in  them. 

§  378.     Officers 

The  board  can  act  only  through  the  officers  and  agents 
which  it  appoints.  Usually  the  election  of  officers  is  held  at 
the  first  board  meeting  in  each  year  after  the  election  of  the 
new  directors.  In  this  way  the  new  directors  may  elect  their 
own  officers  and  thereby  secure  an  official  staff  in  harmony 
with  their  views  and  policy.  The  usual  executive  officers  of 
a  corporation  are  a  president,  vice-president,  treasurer,  and 
secretary.  Two  offices  may  be  held  by  the  same  person  if 
the  duties  are  not  incompatible  and  if  the  by-laws  permit. 

The  president  and  vice-president,  as  presiding  officers  of 
the  board,  should  be  chosen  from  its  membership. 

If  a  chairman  of  the  board  exists,  that  official  presides  at 
all  meetings  of  the  board.  In  this  case  the  general  rule  that 
the  president  must  be  a  member  of  the  board  is  not  so  im- 
perative. If,  however,  the  president  is  to  be  the  chief  execu- 
tive of  the  company,  he  must  almost  of  necessity  be  present 
at  meetings  of  the  directors,  participate  in  their  discussions 
and  deliberations,  and  should  therefore  be  a  member  of  the 


DIRECTORS  AND  OFFICERS  42 1 

board.    Save  as  to  these,  the  officers  need  not  be  selected  from 
the  board. 

The  officers  of  the  company  carry  out  the  instructions  of 
the  board,  and  have  no  independent  powers  or  authority  out- 
side the  routine  duties  assigned  them  by  the  by-laws  or  by  the 
statutes. 

§  379-     Salaries 

Unless  it  is  specified  that  officers  are  to  receive  salaries, 
they  are  not,  as  a  rule,  entitled  to  charge  for  their  official 
services.  Neither  is  it  ordinarily  legal  for  the  directors  to 
vote  compensation  for  such  official  services  after  they  are 
performed.  To  avoid  misunderstanding,  however,  the  condi- 
tions, whatever  they  may  be,  should  be  clearly  stated  in  the 
by-laws — that  the  officers  of  the  corporation  shall  receive  no 
salaries,  or  that  the  officers  shall  receive  only  such  compensa- 
tion for  their  services  as  the  board  may  designate  at  the  time 
of  their  appointment,  or  that  the  officers  shall  receive  the 
salaries  specified  in  the  by-laws.  The  whole  matter  is  one 
to  be  adjusted  from  a  business  standpoint,  and  much  trouble 
is  likely  to  be  saved  by  a  definite  arrangement. 

If,  however,  an  officer  is  neither  stockholder  nor  director 
of  the  company  and  stands  in  no  relation  which  would  make 
it  to  his  interest  to  serve  without  compensation,  there  will 
be  a  prima  facie  obligation  to  pay  him. 

Officers  who  are  also  directors  cannot  vote  salaries  to  them- 
selves even  though  they  are  also  holders  of  a  majority  of  the 
stock.  But  an  officer  who  is  also  a  stockholder  and  a  director 
may  recover  for  services  rendered  outside  his  official  duties  if 
such  services  are  authorized  by  the  directors. 

§  380.     Vacancies  and  Removal  of  Officers 

The  directors  have  power  to  fill,  for  the  unexpired  term, 
any  vacancies  that  may  occur  among  the  officials  of  the  cor- 


422  CORPORATIONS 

poration.  Officers  cannot  be  removed  at  the  pleasure  of  the 
board,  unless  the  by-laws,  charter,  or  statute  law  give  the 
directors  this  power. 

§381.     Dividends 

The  matter  of  declaring  dividends,  the  time  when  they  are 
to  be  declared,  and  the  amount  rest  in  the  discretion  of  the 
board  of  directors.  When  a  dividend  is  once  publicly  declared, 
it  cannot  be  rescinded.  If  the  resolution  is  adopted  but  is  not 
known,  the  declaration  of  the  dividend  can  be  nullified. 

Dividends  may  be  legally  declared  only  from  surplus  or  net 
profits.  If  paid  from  the  capital  or  obtained  in  any  way  that 
will  impair  the  capital  of  the  company,  the  directors  render 
themselves  personally  liable,  and  should  the  corporation  be- 
come insolvent  the  amounts  so  paid  may  be  recovered  from 
the  directors  or  stockholders  for  the  benefit  of  creditors.  The 
general  rule  in  this  country  is  that  before  dividends  can  be 
properly  declared,  any  impairment  of  capital  through  business 
losses  in  previous  years  or  through  depreciation  must  be  first 
made  good.  In  other  words,  dividends  must  be  declared  out 
of  "surplus." 

Dividends  are  paid  only  to  stockholders  of  record  and  must 
be  equal  as  between  holders  of  the  same  class  of  stock.  Par- 
ticular stockholders  may  not  be  favored  either  in  time  or  in 
amount  of  payment. 

§  382.    Bank  Deposits 

The  moneys  of  a  corporation  should  be  deposited,  in  the 
name  of  the  corporation,  in  some  bank  or  trust  company  desig- 
nated by  the  board  of  directors.  Moneys  so  deposited  should 
be  drawn  out  only  by  checks,  signed  by  the  treasurer  and 
countersigned  by  the  president  or  by  such  other  officers  as  may 
be  properly  authorized  thereto. 


DIRECTORS  AND  OFFICERS  423 

§  383.     Execution  of  Contracts 

Corporate  contracts  must  be  authorized  by  resolution  of  the 
board  of  directors.  In  practice,  however,  this  rule  is  somewhat 
relaxed.  The  officers  customarily  make  contracts  in  minor 
matters  incident  to  their  official  duties  without  express  au- 
thorization. If  the  officers  have  been  habitually  permitted  to 
contract  for  the  corporation  without  specific  authorization, 
such  contracts,  unless  obviously  in  excess  of  the  proper  official 
powers,  are  binding  on  the  corporation. 

§384.     Corporate  Seal 

The  corporate  seal  is  either  provided  for  in  the  by-laws 
and  is  therefore  adopted  with  the  by-laws,  or  is  adopted  by 
resolution  of  the  board  of  directors.  It  should  bear  the  name 
of  the  company,  the  state  of  incorporation,  and  the  year  in 
which  the  incorporation  was  effected. 


Review  Questions 

1.  Who  is  responsible  for  the  management  of  a  corporation? 

2.  What  is  the  object  of  having  an  executive  committee?     What 

authority  has  an  executive  committee? 

3.  What  are  the  general  powers  of  a  board  of  directors? 

4.  Who  is  responsible  if  dividends  are  paid  illegally? 

5.  May  a  person  accept  a  present  of  shares  in  a  company  in  con- 

sideration of  his  joining  the  board  of  directors? 

6.  State   generally   who   is   entitled   to   file   a  bill   to   compel   the 

officers  and  directors  of  a  corporation  to  account  for  any 
breach  of  duty  or  breach  of  trust. 

7.  A  company's  earnings  for  a  year  would  enable  it  to  declare  a 

dividend  of  10  per  cent.  The  directors  refuse  to  declare  a 
dividend,  deeming  it  better  to  use  the  profits  in  extending  the 
business.  Have  shareholders  who  want  the  dividend  any 
remedy  at  law? 

8.  Is  a  director  or  a  stockholder  chargeable  with  knowledge  of 

a  corporation's  business  merely  because  he  is  a  director  or  a 
stockholder  ? 


424  CORPORATIONS 

9.     Are  the  executive  officers  of  a  corporation  entitled  to  salaries? 
How  can  officers  secure  salaries? 

10.  Can  directors  give  proxies  for  directors'  meetings  ? 

11.  Has  the  treasurer  of  a  corporation,  as  such  officer,  any  authority 

to  bind  the  corporation  by  a  contract   for  work,  labor  and 
services  ?    Explain. 

12.  From  what  source  should  dividends  be  paid?     May  a  dividend 

be  legally  declared  if  former  losses  have  impaired  the  capital 
of  the  company? 


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